Being your own boss is quite something. Challenging. Yup you betcha. Tough. Most Definitely. Tricky? Truckloads of it.
One of the most common, and most dangerous myths to believe, is that your time doesn’t cost you anything. I won’t go into detail where that particular misconception comes from, rather, I am going to take a quick look at why it’s a bad idea to think that way, and how to cost your time properly when your product is you, your skills and your services.
If you clean houses for a living, it’s fairly straightforward to calculate your costs. You would calculate the costs of your cleaning products and tools, as well as possibly adding in something for travel costs.
Everyone agrees that at this point, you would add on another amount, some call it profit, some call it mark up.
If you have a business coach, you may even add on both labour and a mark-up. You would then have the outline of your pricing structure, and you would charge a set amount per hour, or per floor, or per room. You get it.
All good so far.
Now imagine for a moment, that you are a Copywriter.
You know that to do your work you require a laptop, an internet connection, electricity. And if you have a decent business coach, you would also have done a couple of exercises to pin down a budgeted hourly rate (BHR) for all of these costs added together to be included in your pricing.
Again, equipment plus some other expenses, calculated out to the smallest unit of work.
Now comes the myth.
If you are a one-man-show and you do the work yourself, it’s tempting to believe that you are saving the salary of the person you could hire instead, and thus because of this, you can charge less to your clients as a result.
I’ve even heard a few people proudly state this as their point of difference. Huzzuh???? What?
While it may sound like a good idea to publicly proclaim that you work for nothing- and be honest, that is really what you are saying – in the long term it’s really, really, bad for your business to do this.
Why?
Simply stated, you will attract discount-vampires and make everyone else suspicious about why you don’t charge for your time. Serious business people, with money to spend will wonder why on earth they should value your services, when you don’t value yourself enough to include a cost for your time.
And you will end up working for nothing, killing yourself with stress from the people that expect everything for nothing as they grow more and more demanding.
Identifying the problem
Here’s a quick, rough way to check if you have a problem in your costing , with 2 exercises you can do to help you understand what your time costs you.
a) You ; the Equipment
Think of yourself as a piece of equipment or machinery, and consider all the costs that go into keeping you alive, functioning as a person and working for one month. Add up your grocery bill, water and electricity, your mortgage or rent etc . Divide this number by the adult members of your household. Now divide again by 168. This is your Budgeted Hourly Rate. This is what it costs you to be alive, working and at your best Per Hour of the working day.
a) You ; the Staff Hire
Imagine you had to hire someone to do the skilled part of your work ( so exclude the business owner tasks , and focus on your main business service or offering )
Consider the skills and experience that person would need to have.
Do some research on the average salaries being paid to people employed to do work in that category, and calculate out the hourly rate for this person, after tax.
The hourly rate you have just calculated should help you clarify what it costs you when you give away your time for free. Take a good hard look at how far off your actual costing is from this amount, you may be selling yourself, and your expertise short.
Don’t panic
Before you go rushing off to double or triple your prices; consider that this is only part of the picture about your business and your product costing. These 2 exercises can work out to vastly different amounts, and that is expected. These calculations are not hard and fast rules, and they are certainly not standard accounting or business practise, in any way shape or form. You shouldn’t be doubling your prices just because the numbers look scary.
If you believe you have been underselling yourself then start the process of correcting your pricing by working out a new price list. This new price list should be compared to your current one, and then implemented gradually.
And lastly; please don’t ever claim your point of difference is your price. It does you no favours in the world of business; and really isn’t all that appealing to the type of clients you want to attract and keep.