Pricing your Product: A service-based business
Pricing your services is easy using this model. Make enough sales to cover your costs and stay in business longer. This model works even if you need to add variable one-off costs.
How it works:
1. Identify all costs
Interest charges vary so they require manual addition. Not all charges will be consistent month to month.
2. According to different rates; how many hours does that equal.
3. Determine your volume according to the rate and hours needed to cover costs.
First, aim to Break Even
It’s easy to find out how much you need to charge to Break Even. given the number of hours you want to work.
You can determine how many hours that you want or have to work.
You can use your hours to determine your charge or the other way around. You need to work based on your hourly rate. It’s so versatile and easy.
If your overheads [weekly] are $1312.91 – this is the amount you must earn to cover your costs. It’s that simple.
Working 30 hours a week, your base rate is $43.76. [43.76 x 30 x 52 = 1312.91]
Playing with the figures
To reduce your hours to 20 hours a week – your hourly rate must rise. If you want to work more, it goes down.
How Does it Add Up?
Non-Chargeable hours aren’t billable. You could work 10 hours a day but the output might be only 4 billable hours. To solve this, employ someone.
You could employ someone to work 6 hours a day doing billable work. Add the cost of that worker to your overhead rate to form your new cost. Use this to determine whether you’re able to Break Even doing this.
Using these numbers, your overhead cost per week is $1312.91. Add to that the weekly cost of your employee, say $250 a week. This increases your BEP at 30 hours a week to $52.07 per hour.
Your employees free you up to charge more billable hours. Either that or they do work which is billable. You win, your business grows.
Say you charge $58 as your base rate per hour. You have a tiered pricing system that rises from that price. Your employee produces work at $58 per hour. You produce work at your next tier of $82.50
You’re working 10 hours @82.50 = $825
Also 10 hours @$58 = 580
Your employee works 10 billable hours @$58 = 580
You’re also working 10 hours a week on growing your business with more time.
Sales = $1985
Costs = $1312.91 + $250 = $1562.91
Charging low rates (to cover costs) you now make a profit of $422 a week.
You’re working 10 hours on your business and only working a total of 30 hours a week.
If you know your costs, you can set financial goals. Set up processes and hire people. This works for a remote service accounting business.
Takeaways from this blog:
1. Set yourself up to cover costs, first.
2. It all starts with knowing what they are.
Rapid Entry Online Accounting can help you identify your costs and know your pricing. We advise our clients on how to price their services and how to understand their market and their competition. Get in touch with me, Dianne at firstname.lastname@example.org today to make a time to have a chat about your situation and how we can help.
Dianne Jewell is an accountant and advisor. Rapid Entry is in partnership with Ashawed Accounting.
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