Before getting too far into this particular topic, let me be clear about the intended audience.
First, this post is meant for new entrepreneurs that have started their business very, very recently. Second, it’s primarily targeted at skilled professionals that bill by-the-hour or by-the-job for their work, such as accountants, consultants, and similar professionals.
One of the most frequent mistakes that new entrepreneurs make in the early stages of their businesses is to set their prices too low by basing the pricing level on what their individual wages were at their previous employer. For example, an accountant that made $100,000 in their last job may set their price at $50/hour because that was approximately what they were making in their job. Frequently the justification is that as long as they can earn what they earned previously, then they will be better off because they will also have more independence through being self-employed. Unfortunately, both assumptions are false. 🙁
The main factor that new entrepreneurs forget to consider is that it not only takes time to do the work, it also takes time to get the work. Doing the work is only half the battle. For most people, after they have done all the work they can for their family, friends, and a few referral sources, it begins to take as much time if not more to track down new work to do. Therefore, basing your billings off of your previous earnings leaves you greatly lacking when it comes to earning a living.
Even if you spend half of your time getting work, and half of your time doing work, then you basically just own a job. In fact, you now own half a job in your previous profession, and half a job in sales!! You haven’t left any time for training or managing a staff that can assist you with getting the work done. For this reason, simply doubling your prices isn’t a great idea either. You have to price higher in order to cover the expenses of truly “owning” a business.
Most entrepreneurial professionals will start to realize that billing 3 times your previous earnings is really the starting point. By billing 3 times that amount, you cover your sales time, your work time, and additional expenses such as paying staff and purchasing supplies. You may even have some profit left over as well – which was probably the original idea when you first started your business.
This is only a rule of thumb of course. Many businesses find that billing several more multiples makes sense depending on the value of the service, cost of resources, and other important factors you have to consider. Either way though, simply billing your previous hourly pay rate is a bad idea. It leaves you slowly digging a financial hole for yourself, while getting your customers used to a low rate that isn’t going to be workable long-term.
I hope this post has been beneficial for you. Please feel free to reach out to discuss your particular situation.
As always, I wish you the best in your business.
Mark Goldman
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