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Pricing Mistake 1: Don’t confuse revenue and profit.

It’s amazing how many people say, “I want to make X,” but have no idea how they got to X.

Maybe it’s what they are currently making or what they would like to make, but it’s very rarely based on anything concrete. This is especially true for salaried employees who want to start their own business.

For instance, if someone says they want to make $100,000 a year, that usually means that’s what they want to take home. They think the equation looks like this:

I earn $100,000 = $100,000 in the bank.

In reality, the equation is more like this:

Product-based business: I earn $100,000 in revenue – taxes – overhead – webhosting – e-commerce – product costs, etc. = $50,000 in the bank.

Service-based business: I earn $100,000 – webhosting – gas – marketing – insurance – internet, etc. = $90,000 in the bank.

It may sound obvious, but how often have you heard someone say in frustration, “I just don’t get it. I make X, but I never quite seem to get ahead”?

The simple truth is that our product-based business friend doesn’t want to make $100,000. He wants to make $150,000 so he can take home $100,000. Our consulting friend wants to make $110,000 not $100,000. But neither one of them has updated the number in their head to reflect what they really have to make in order to make what they want to make.

Pricing Mistake 2: Don’t forget to count non-revenue generating hours.

There are dozens of different salary guides and pricing calculators out there, but they are only as good as the numbers you put in them.

When asked to put in variables about work time, people often say something like “I’ll work 40 hours a week, five days a week, 48 weeks of the year just like I do at my current job. Therefore, if I want to make $60,000 a year, I’ll have to charge $31.25 an hour”:

Income/Hours per week*number of weeks = hourly wage

$60,000/(40 hours*48 weeks) = $31.25.

The problem with this is that it fails to take into account the time you will have to spend working on your business vs. working in your business.

When you are working in your business, you are using your expertise to generate revenue, add value, and move the business forward.

When you are working on your business, you are doing all the non-revenue generating things that must occur in order for the business to run and keep clients coming in the door: bookkeeping, continuing education, email, networking, marketing, etc.

Therefore, the reality is you have two choices if you want to make $60,000 a year:

  1. Work more hours and charge the same $31.25.

If we assume you will be spending 10 hours per week working on your business doing non-revenue generating activities, then you are actually working 50 hours a week, not 40, so your effective hourly rate is $25, not $31.25 using the same formula.

That means, aside from taking away 10 hours of your free time, you are also costing yourself $250.00 per week:

number of hours you charge for *(effective hourly rate – charged hourly rate)= profit or loss
40*(25-31.25) = -$250 per week

This is what a lot of people do, and it can be a big contributor to the “I make X, but I never quite seem to get ahead” mentality discussed above. After all, this equates to a loss of $12,000 a year, which, once again, means that while you may make $60,000 in income, you actually only take home $48,000.

2. Work the same 40 hours but charge more per hour.

In this case, if you spend 10 hours a week working on your business and 30 working in it, then your hourly rate will be $41.67, not $31.25 using the same formula and you will actually be earning the full $60,000 per year:

number of hours you charge for *(effective hourly rate – charged hourly rate)= profit or loss

30*(41.67-41.67) = 0; you’re totally balanced and on point.

Pricing Mistake 3: Don’t forget about opportunity cost.

Pretend your accounting takes you 4 hours a week between figuring out the software, recording transactions, figuring out accounts receivable and accounts payable, billing, etc.

If your hourly rate is $31.25, then that activity effectively costs you $125 that week (4 hours * $31.25), or $500 a month (4 weeks * $125).

This is where opportunity cost comes in:

Opportunity cost is the cost you incur by giving up one thing in favor of another. It’s the founding principle of the 4-Hour Work Week, and many other productivity and growth strategies.

In this case, you’ve given up four hours of time to do your accounting and those four hours effectively cost you $500 this month.

Now it’s time to ask yourself, would you pay $500 a month for someone to do your accounting? If the answer is no, then it’s time to outsource.

That’s where we come in. Our business is taking over all the things that cost you money working on your business, so you can get back to working in your business:

  • Accounting
  • Management
  • Payroll
  • Admin
  • Web Presence

Our accounting services start at $199/mo. – less than half as much as it really costs you to do it yourself.

Want to learn more about how we can help take your business to the next level? Contact Cloud Friday today to get started!