How many times a day do we see this question posted on forums all over? It appears in every industry group on LinkedIn, Facebook and even Google +. Business owners looking for the magic bullet and the quick answer. That’s the age we live in. Seeking to get an answer with little or no reasoning behind it. “Just PLEASE tell me what to charge” or “how much should I charge for this?”. We have all watched the posts and read the answers that pour in from all over the world. And what do we get? An assortment of numbers that is like Forest Gump’s box of chocolates. Just pick the flavor of the day and go with it. Makes about as much sense.
I caution business owners everyday to not take the number or price that your business colleague might use or the numbers that are spit out on forums. Instead, invest in learning your trade, understanding your financial situation, knowing what YOU and only you need to charge to make a profit. It is different for everyone. Unless you have a twin in your market, who has exactly the same expenses and costs as you, who has the same trade market as you and same employees, what someone else is charging has no relevance on what you need to charge other than your awareness of the competition.
Let’s start at the beginning with your numbers. Oh and by the way, be sure you invest the time to learn to estimate without an online estimating calculator BEFORE you use one. New business owners today may find this funny, but millions of dollars of profitable business was done long before there was estimating software. I’m not kidding! Paper, pencil, a manual calculator and working knowledge of a business’s expenses were all the tools that were necessary to come up with a profitable price. Entering an inaccurate number into a software calculator can eliminate profit in a split second. So have an good accounting system in place and understand what it is telling you.
Here’s what you will need: Your costs for doing the job! And that includes:
- Labor expenses including what you will pay in labor for employees to do the work
- Payroll taxes and other associated expenses with that job
- Administrative costs; what is your overhead?, rent, admin wages, advertising, phones, insurance all go into overhead often called Admin Expense.
- Equipment and supplies you will need for that job
Here’s an example of how you can get into trouble using only software or the advice of someone else:
Business owner Sally is using an online calculator and plugging in the numbers. She gets to the section about overhead costs and Percent. Instead of having up to date financials, (her accountant runs P&L’s quarterly not monthly) she guesses at an overhead % of 22 and plugs in the number. The software spits out a number for her quote. Now upon further research, she finds that her true overhead costs are closer to 34% and that her proposed number – if accepted- will produce a loss on the job. Next she asks what to charge on a forum and gets back a variety of suggestions that are all over the board compared to the software. She picks one that looks good, like the box of chocolates. Can she make money using that price? She doesn’t know, it’s a number someone else gave her. Can she keep the account giving the service level she has built her company with? She doesn’t know that either but probably not, especially if she is losing money. Can she stay in business long repeating this process? Absolutely not.
The point of the example and this article is that before you blindly take the words from another forum participant, or the random numbers spit out by software, take the time to learn your trade and more importantly, learn how to estimate by knowing your own numbers. Remember that what is good for Sally, is probably not good for anyone else and vice versa. Are there industry averages? Of course. But those are just what they say they are. Averages across the country in a wide variety of business types, with an even wider variety of expense numbers. Know yours and how they impact profit and you will never have the need to ask for a price again.