Bigg success is life on your own terms. Today’s topic really covers two of the five elements of bigg success – time and money.
Specifically, we want to discuss charging for your time. If you’re a consultant, a coach, a freelancer or anyone who bills hourly, how do you determine what an hour is worth?
One of the biggest reasons small business people don’t reach bigg success is because they don’t charge enough. In fact, in many cases, the business fails for this reason.
So pricing your service is very important. We can think of two primary methods to arrive at a price:
The Market Approach
This is probably the most common way that entrepreneurs arrive at a price. With this method, you simply look at your competition to see how much they’re charging. Then depending on your strategy, you charge the same, a little more or a little less.
The Cost Approach
Here you determine how much you need to charge based on your cost structure and your opportunity costs. By opportunity costs, we mean:
How much could you make working elsewhere?
Add your hard costs to your opportunity cost to arrive at your price per hour.
The downside to just using the Cost Approach is that it ignores the market. For instance, your price may be a lot lower than the market but you wouldn’t know it because you haven’t looked at the market. You would be leaving money on the table.
Or it may be a lot higher and the market won’t compensate you what you the amount you need for your time. The result would be a failure that could have been avoided.
The Market Approach also has its limitations. We have a friend who looked at his competitors’ hourly rate to determine how much he should charge. He opened up his shop and started losing a lot of money every month.
He was perplexed, so he did a little more competitive research. He discovered that all of his competitors were losing money as well. Everybody was in a price war; nobody was charging enough to make money.
So he increased his price based on his costs. He lost some customers when he did this but he started making money.
Because of the limitations each method has, we recommend that you use both methods when you’re trying to arrive at a price for your service. Then you’ll have two reference points from which to make decisions.
The Value Equation
Now we want to move to making more money per hour. From the customer’s point-of-view:
From this equation, you can see that there are three ways to increase the value to your customer:
- decrease your price
- increase your service level
- improve your quality
Of course, decreasing the price will very likely hurt you in the long-term. Look at it this way – do you want to work just as hard to make less money? Of course not. Yet a lot of small business people do this first.
So you would prefer to increase the value to your customer by providing a higher level of service or quality.
Let’s focus on service since quality is more up to you. Think about these four D’s:
By designed, we mean customized but we had to have a “d-word”! Dangerous might mean “risky”. However, keep in mind that risk is a matter of perspective. The customer may view something as extremely risky but you know how to manage the risk so it’s not really risky at all for you.
doesn’t want to do, doesn’t know how to do, is afraid to do or just simply can’t do.
When you can do that, your customers will perceive more value for your service. You’ll find it easier to charge a premium. That’s more money per hour. That’s bigg success!
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Thanks so much for checking in on us today. Please join us next time when we’ll talk about the downside of education. Until then, here’s to your bigg success!
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(Image in today's post by hisks)