How to price your services for profit
I started my business several years ago on a whim when I was still working a full-time corporate job. An opportunity presented itself to get paid to do a thing I was good at (editing copy for a course and creating a fillable PDF workbook) and I went for it.
And it went so well! And so over the course of one weekend I created a simple website, decided what to charge for my services, and hung out my shingle as a Virtual Assistant.
I was fortunate that my skillset allowed me to land several clients very quickly, I had a bunch of money in my savings (I had just sold my house) and within a few months I was able to quit my full-time job.
That all sounds great, right? Living the dream!
Only, there was ZERO MATH involved in what I decided to charge for my services.
I thought that because I was new, I should charge very little money to get my foot in the door. And for the first six months, I worked for an embarrassingly low rate and was constantly broke.
There were a number of reasons that it happened this way:
- I undervalued my experience and skills. The stuff I knew how to do was highly technical and not many other VAs had my skillset, but I used what other people were charging as model for my own prices.
- I went with an hourly rate because it's what I was used to, which meant I was penalized being good at my job. My clients would happily pay me to do something that took ten hours, but when I became more efficient and it only took me six hours, I made less money. Dumb dumb dumb.
- Again, ZERO MATH. I didn't factor in my business expenses, my personal expenses, taxes, insurance... I literally pulled a number that sounded good out of the air.
And surprise, surprise: it was not enough money to keep my business and life in the black. Despite having incredibly low business expenses, I didn't consider how much being a self-employed person was going to cost me in insurance and taxes. And every month I came up with less left over than I thought I would have.
Be ye not a stupid as me, friend. Let's figure out right this very instant how much money you need to be charging for your services in order to turn a REAL profit.
Ready? Let's do it.
1. Add up all of your monthly personal expenses.
Make sure you include:
- Rent or mortgage
- Utility bills
- Internet and cell phone
- Doctor's visits and prescriptions
- Vet bills
- Health, auto insurance
- Debt payments
If you have irregular bills or expenses that you pay yearly, quarterly, or only when you need them (like doctor's visits or vacations) take the average amount that you spend on those things per year and divide it by 12 to get an approximate monthly cost.
Now think about all of the OTHER personal expenses that aren't exactly regular or "mandatory" but always happen anyway. This would be things like new clothes, dinners out, picking up a new book, etc.
We'll call this "fun money". Create a line item for it in your personal expenses and assign a monthly cost.
This can be a ballpark, but try to be realistic. Your number might be $100 if you're very frugal or $500-$1000 if your lifestyle is more spendy or if you live in an expensive area. I like to round up to the nearest $50.
I have $1,900 of personal expenses per month.
2. Add up all of your monthly business expenses.
Make sure you include:
- Software subscriptions
- Website expenses
- Money you pay to contractors
- Professional insurance
- Accounting or bookkeeping fees
- Travel expenses
- Debt payments
Again, if you have irregular expenses, estimate the yearly cost and then divide by 12.
Now, think about all of the oddball expenses that come up only occasionally. For me, these might be things like purchasing stock photos or fonts, taking an educational course, traveling for business, or buying a new computer.
We'll call this "business extras". Create a line item for it in your business expenses and assign a monthly cost. Round up to the nearest $50.
I have $200 of business expenses per month. (Yes, really. I run a lean business.)
3. Add your totals together to get your 'breakeven number'.
This is the minimum amount of money that you need to make each month to stay in business without going into debt and to maintain your lifestyle.
My total breakeven is $2,100.
Now, let's switch gears and think about your services and your workload.
4. Write down how many client 'slots' you have per month.
This is the number of clients you have room for in your schedule each month, and should be a number than you can actually GET. This isn't a place for reaching for the stars. How to bring in more clients is a discussion for another post, but for right now, just focus on a number that is attainable as of today.
If you're starting a brand new business, this might be a guess. That's OK.
- If you're a coach, this would be the number of clients you can work with per month
- If you're a web designer, this would be the number of sites you can build per month
- If you're a course creator, this would be the number of new students you can expect to enroll each month
If you bill on a timeline longer than one month, then use a decimal. So if you build websites and each one generally takes you two months, you handle 0.5 websites per month.
Note that if you're currently working with way more clients than you actually want and you're drowning, this is where you make adjustments. If you have 8 client slots and working at that volume is killing you, for the purposes of this exercise, let's say you drop down to 6.
I generally work with 3 on-retainer clients per month that I help with all sorts of business and marketing tasks, and in addition to that, I usually take 1 project building a website or ecourse per month, so I have 4 total client slots.
5. Now, let's do some math.
We're going to calculate what a 100% profit looks like in your business, meaning you're covering your expenses completely, and also pocketing an equal amount of cash.
Here's your formula:
Breakeven Number x 2 ÷ Number of Client Slots + 30% for taxes
So mine is:
$2,100 x 2 ÷ 4 Client Slots + 30% [$315] = $1,365 per client slot
That means I need to be selling every client slot I have for at least $1,365 to achieve a 100% profit where I'm pocketing as much money as I'm spending on my expenses.
Are you already charging more than this number? YAY YOU! You are 100% profitable!
Obviously, you might not be doing the same thing for each of your clients, so there's some balancing necessary here between the cost of your services. If your number is $1500 per slot and you have three slots ($4500 total) you might charge two clients $2k each for a larger service and another client $500 for a smaller service to reach that number, and that's A-OK as long as you're hitting the right total.
Now, if I'm that web designer who designs a site in two months, these numbers will look A LOT different.
Where I'm dividing my income across 4 slots per month, that web designer only has HALF a slot per month, because they work on one project over two months. That means to hit the same 100% profit total, they'd need to make EIGHT TIMES as much for each slot.
$2,100 x 2 ÷ 0.5 Client Slots + 30% [$2520] = $10,920 per client slot
Is that price reasonable for your services? Will your clients pay it? They might!
If not, it may not be possible to hit a 100% profit with your current expenses and pricing. You might need to dial down your multiplier to 1.5 for a 50% profit, find clients with larger budgets, or reassess your processes to see if there's a way to be more efficient and shorten your timeline.
By using this formula, you will know exactly where you need to make changes in your pricing or services.
Wanna plot out your income, expenses and profit for the next YEAR to know in advance exactly how much you'll be making every single month?
Gotcha covered. Grab my spreadsheet below. You'll plug in your expenses, plot out your contracted income, and be able to see instantly whether you're profitable in each month, and where you might have holes throughout the year that require a little extra hustling.