Calculating Your Costs and Prices
In order to run your business successfully, you’ll need to have a firm understanding of your expenses, including your startup costs, fixed costs, and variable costs. You’ll also need to develop a pricing structure for your services. Here are some considerations to take into account as you do so.
Whether it’s your costs or the prices you'll charge, it’s important that your estimates be based upon current realities, not a hunch as to what you think these should be. Online research may help you find examples of typical costs for the items you’ll need to get started, from inexpensive items like printing business cards to more expensive items like renting a work space. You may also be able to find prices listed online by those offering services similar to those you plan to provide, which should give you some indication as to what the market will support when creating your pricing structure.
While that may be a good start, it's also helpful to speak to someone in your field with firsthand experience. Some may view you as a competitor and politely decline, but if you have a good relationship with someone who already has a career similar to the one you aspire to, they may be willing to provide you with valuable advice that can save you time and money.
Startup costs are costs that are not likely to recur frequently; that is, they are specific to the initial business creation process. Common startup costs might include the following:
- Work space
- Legal fees (permits, licenses, applications, etc.)
In addition to costs like those above with a monetary value, you should also consider non-monetary costs, such as those that will require time, like the following:
- Product or artistic development
Fixed costs are costs that will reoccur frequently and with regularity, but with little to no variation over the course of time you are budgeting for. These might include the following:
- Utilities (electricity, water, heat, phone, Internet access, etc.)
- Supplies (paper, materials specific to your service, etc.)
- Monthly payments for services (e.g., website hosting)
- Monthly payments to employees or contract service providers (e.g., a consultant)
Variable costs are those that are likely to change over the course of time and may occur sporadically; sometimes your variable costs may be high, and other times they may be low. Examples of variable costs include the following:
- Maintenance or replacement costs (gear, property, equipment, etc.)
- Raw materials for physical products
- Shipping fees
- Advertising and marketing materials
- Transportation and travel costs (fuel, parking, public transportation fees, etc.)
- Networking events (professional conferences, workshops, etc.)
- Client development (meals, entertainment, etc.)
What should you charge clients for your services? The answer to this should be based on a few key factors:
- What will the market support? You need to find out what others are charging for similar services. If you charge much more than they do, you are likely to lose business to them. If you charge much less than the competition, you may be able to attract more clients, but be careful that you don’t do so at the expense of making your business unsustainable. One strategy is to charge less than the competition at first but then gradually raise your prices once you have built up an impressive array of satisfied clients.
- What is your level of experience? Even if you know that you're the best at what you do, if you’ve only just started doing it, chances are potential clients aren’t going to be willing to pay you as much as someone who has been in the field for many years or decades. Be patient. As you build up your portfolio, you'll have more leverage to justify a higher pricing structure.
- What does the job in question involve? Remember: you're drafting a pricing structure, not just “a price.” In some fields, a “one price for all” model may make sense. In many fields, however, your price should be partially determined by the nature of the work at hand. For example, if you run a general business band, you would not charge the same fee to play music for three hours at a wedding as you would to play a half-hour set as part of a free outdoor festival in a high-visibility public park. Consider the variety of work you might encounter, and then come up with a pricing structure that matches each type of work.
Crunch the numbers. Use a spreadsheet so that you can easily make changes in the future as they arise.
Once you have determined your startup, fixed, and variable costs, you should have a good sense of the income you'll need to generate from your services in order to run a sustainable business. However, your pricing structure should not be merely a reflection of the need you have identified based upon calculating your costs and living expenses. Your clients are not interested in what you need to be profitable. Rather, they will pay for your services based on what the market supports, the requirements of the job, and your level of experience.
If your pricing structure cannot support your costs plus your other living expenses, you don't currently have a viable business plan. That can be okay—for a limited time. It may take time for new businesses to mature and reach the threshold of sustainability. If that’s the case, you'll need to consider how long you can afford to lose money on the endeavor; in other words, give yourself a deadline.
You probably can’t expect overnight success, so you may need to get creative to find a way to make your enterprise—and your life—work during this initial phase. If you cannot give yourself ample time to establish your business, it may be better to wait until you can do so. While you may be eager to launch your business as soon as possible, it's better to do so when you can set a deadline for yourself that you can reasonably expect to meet. Doing so will help you avoid the frustration of having to quit shortly after you get started. This may mean that you need to save money by engaging in other work first or during your preliminary phase so that you can build up enough of a cushion to allow your business time to grow.
Timing is everything, so don’t rush it, but keep your long-term goal in sight even as you wait for the right time to launch. While you're still in the planning phase, seek advice from others on your plans, including a Career Center advisor. We're here to help.