Tuesday, April 7, 2009
What Should I Charge?
Knowing or deciding what to charge can be one of the toughest questions for freelancers or entrepreneurs who are building a new business or going into a new line. But don't let it become a source of undue stress. There are some practical principles that can make it easier.
The first step is to find out the "going rate," as far as such a thing exists. There are two factors to consider here. The more important is: what do others charge? Second, who are your clients?
The only way to find out what others charge is to ask. Ask people you know who provide or use similar services. If you find it difficult to get information this way, search the web for similar services, contact them pretending to be a potential client, and ask their rates.
Using either or both of those methods, you can determine a range of rates that are reasonable and expected.
Next, think about who your clients are, actual or potential. Are they local small businesses or scrappy startups likely to be on limited budgets? Are they well-funded startups? Are they big corporations with plenty of money? A large national firm can probably pay more than the mom-and-pop cookie bakery down the street. This can help determine whether you should ask for the higher end of your range or the lower end.
But once you're aware of the "going rate," the primary principle is to always ask to be paid what you're worth. Perceived value is real value.
Here's an instructive example from the music industry. Independent musical artists often wonder how to price their CDs. (Yes, people still buy CDs, especially at live shows.) Some musicians think like this: since the total cost of recording and manufacturing my product was only (let's say) $3.75 per CD, if I sell them for $10 that's a nice big profit. A second run of the same CD costs even less (say $1.50) to produce, since no further recording costs have been incurred; so now at $10 retail, I'm really rolling in profits. Right?
Not so fast. Your pricing shouldn't be based on a fuzzy sense of what's a "reasonable" profit, but on the value of the product. If most touring musicians are charging $15 for a CD, then $15 is the value of a full-length music CD. A concertgoer isn't buying a plastic disc in a box, he's buying a piece of the experience of hearing the music live -- a piece that, unlike the concert, will last forever. That's value.
Similarly, a service provider who bills on an hourly basis should think very carefully before pricing herself significantly below the competition in the belief that it will earn her more business. An initial discount for a new client might, in some circumstances, be a good idea, but it should be clearly indicated as a special one-time deal. Regular pricing should be set at a level that accurately reflects the perceived value of the services.
Why does a lawyer get hundreds of dollars per billable hour? Are his services really that much more valuable than those of a hospital orderly, a child care worker, a dock worker, a proofreader, or a temporary receptionist? No, but they're perceived that way, and perceived value is real value.
Especially when dealing with a large or well-funded client, price yourself on the high end (or at least squarely in the middle) of what you have determined is the going rate. You can always negotiate from there if it's a job you really need or really want.
With a smaller client, you can consider asking for a bit less, but use this option with caution. I've had situations where I've asked a certain rate and had my offer accepted with such enthusiasm that I was sure the client had been prepared to pay more. This is not what you want to happen. Much better to ask closer to the high end, while being secretly prepared to negotiate; your potential client is probably prepared to negotiate as well. That's just business.