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This article is intended to be read alongside LegalVision’s Hourly Rate Calculator, which you can download here for free.
Every business owner asks themselves this question at some point: “Is this worth my time?”
To answer that question, you need to ask this one first: “How much is my time worth?”
For consultants – accountants, lawyers, advisors and coaches – this question might be central to your pricing strategy. Or, put another way: “How much should I charge for my time?”
To help answer this question, we have created an Hourly Rate Calculator.
But it’s not enough to have the numbers. You need the tips, tricks and principles to help you implement your hourly rate pricing strategy.
Price-taker or Price-maker?
You need to decide if a business like yours (in your industry, at your stage of growth) is a price-taker or a price-maker.
A price-taker charges roughly the same price as their competitors. This is common for new businesses; it’s hard to command a higher price until you’ve built the reputation to justify it.
For price-takers, your hourly rate is about the same as your competitors’ rates. As a result, in order to earn an attractive gross profit margin (the ratio of your hourly rate to the average cost of providing an hour of work), you need to keep your costs low.
Typically, price-takers should accept lower gross profit margins in the short term, rather than cutting costs or increasing rates. As your service improves and your reputation builds, you can increase your prices and your margins.
A price-maker, on the other hand, can charge a price that is significantly different to their competitors. Price-makers provide a highly differentiated service, or have an exceptional reputation, that allows them to charge more than their peers.
Price-makers are in a position to determine their own hourly rate, while price-takers must align with their competitors’ rates.
This article concerns price-makers – businesses that have a differentiated service and can vary their pricing.
Here are three tips you should follow when putting a price on your time.
1. Leave Your Ego At The Door
Pricing your time is a psychological minefield. Questions like: “How much is my time worth?” can be misconstrued to mean: “How much am I worth as a person / business owner / advisor?”
An emotional approach to pricing can lead to overcharging or undercharging your clients.
Try to leave your ego out of the equation. Pricing is a delicate art, even without the intrusion of feelings of self worth. That’s why our Hourly Rate Calculator uses a ‘cost plus margin’ methodology to calculate your hourly rate. You sum the costs of providing an hour of work, enter a target gross profit margin and this determines your rate.
A mathematical approach removes the temptation to charge what you feel justifies your pedigree and guarantees a gross profit for each hour of advice you provide.Continue reading this article below the form
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2. Stand By Your Rate
When a potential client balks at your rate (and one or two inevitably will), it’s tempting to offer a discount.
However, once you’ve calculated your hourly rate, you should avoid discounting your time.
The cost to provide one hour of advice is always the same – it’s one hour of your time. So if you discount your hourly rate, you’re directly eating into your gross profit margin.
Discounting also sends a signal that the service you’re providing is not worth as much as you initially advertised.
One exception is for introductory offers or bulk discounts. Personal trainers will often provide the first session for free. This is a recognised and potentially valuable sales tactic. Trainers will also sell bundles of sessions – say, 10x one-hour sessions – and offer a bulk discount. This allows trainers to increase their utilisation (another important metric for service-based businesses). These tactics do not devalue the service, in fact, they promote its use.
3. Make Sure You Get Paid
Businesses that charge clients by the hour typically get paid in arrears.
It’s important to have a robust debt collection process, so you are actually paid for your services, on time.
Getting paid late increases your working capital requirement – the amount of money you need to cover your expenses (like salaries) while you’re waiting to get paid by your clients. Working capital is usually borrowed from a bank at the cost of interest payments.
Check out LegalVision’s guide to getting paid here.
An airtight Client Agreement will also help you define the scope of your services and get paid fairly.
Businesses that provide differentiated services have some power to determine the price they charge for their time. Choosing an hourly rate that reflects your input costs and target gross profit margin is a good place to start. Try not to discount your services; but revisit your pricing from time to time. Finally, take the time to ensure you receive payment for your hard work.
If you need advice on how to set up your services business, our commercial lawyers can help. Call 1300 544 755 or complete the form on this page.
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