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how to know what to charge when you work for yourself

The age of the entrepreneur is upon us. No longer does one need huge capital to start their own business. E-commerce allows for aspiring entrepreneurs to take baby steps, with many people launching side businesses while still working full time.  Social media generated sales over expensive shop fronts and international distributers allows for many small businesses to thrive in a crowded marketplace. 

With the flexibility of being able to work from home at any time you chose, having your own business has many appeals. Earning money is the tricky bit though, and ensuring the businesses is viable in the long term is even harder.  Starting up a business can be daunting for many reasons, but knowing how much to charge for your goods or service can be one of the most challenging parts of setting up. 

How much you charge will have a huge impact on the following:

  • Where you sit in the market when compared with competitors
  • How much profit you make for your business
  • How much you earn per hour or your take home pay
  • Whether you want to be considered budget (and then potentially not so good) or elite (and considered overpriced and bad value).
  • The business’ potential to grow and expand

Having a well through out business plan with a very clear Vision and Purpose can be incredibly valuable as the first step to determine pricing. Closely examine what your intention is for your business, as well as its goals.

A good way to begin to work out how much to charge is to calculate the very minimum you need to earn per hour to cover your costs (or the minimum number of products you need to sell).  You want to ensure you are receiving a basic enough wage to keep the business going.

They say the first 3 years of running a business is the hardest, and the first 6 months is the hardest of all. So if you can manage to stay even in the first 6 months you are doing something right, but even if you aren’t quite making a profit, if you have the financial support and a strategy to ensure you don’t get too deep in trouble, there may be light at the end of the tunnel.

Speaking to an accountant or your financial institution can be good to help ensure you have a solid financial strategy and back up plan to cover you while you find your feet.  

A great tool to figure out how to charge for your product or service is a ‘pricing work sheet’. This will help you work out how much you need to be earning on a per hour basis.

  • Firstly, nominate your ideal weekly income after tax - this is how much you want in your hand. Don’t get too unrealistic here, but it can be a fun exercise to do a realistic figure and then your dream figure as a separate exercise – the second figure can be the figure you work towards as your business grows.
  • You need to multiply this by 52 to get your annual income.
  • Holidays need to be taken off the total yearly working weeks. For example if you want to have 4 weeks holiday you will only be available to work 48 weeks of the year.
  • Then map out your ideal week. What days do you want off? Ensure you set aside time to do work that doesn’t necessarily earn you any money per hour but which is essential to the running of your business (such as accounting, marketing, ordering stocks etc). Whatever hours remain will be your actual paid working hours where you can charge a per hour fee.
  • Once you work out how many hours you are available to do paid work per week then times that by the number of weeks you plan on working.
  • The next thing to work out is your ‘after tax and expenses hourly rate’, you can come up with an estimate by dividing your desired annual income by the number of paid hours. Then you need to allow a wide margin to factor in expenses, unpaid work hours and tax, try multiplying that figure by 4 and you’ll have a guide as to how much to charge per hour for your services.

One important thing to remember is while you need to make money to survive, if you make your business about the money the business won’t last. It needs to be built on more than the desire to be wealthy and financially viable, it needs to be something you enjoy, strongly believe in and are passionate about. And over time if you no longer enjoy it you need to still be passionate enough about it to potentially sell it to someone else who can keep the business running and pay you enough to either retire or start all over again with a new idea.