Setting Small Business Rates Right: Four Common Pricing Mistakes Made by Entrepreneurs
Entrepreneurs that start their own small businesses within the service industry have a lot of freedom when it comes to making important decisions like setting business rates that will impact the future and profitability of their companies, which unfortunately means mistakes are easier to make. One of the most critical decisions any entrepreneur will make early in the life of his/her business is about how to set rates that will provide a liveable wage and attract the type of clients that are interested in building long-term business relationships.
Setting entrepreneur rates right from Day One of business in the service industry is incredibly important because of the relationship between hourly billing rates and salary affordability and the difficulty of changing rates significantly without alienating clients if they end up being too low to nourish small business growth. Anyone running his/her own small business will also have to cover all costs associated with running it.
The benefit of many types of service businesses – such as computer consulting companies and accounting companies – is that the overhead can be quite low and often the business can be headquartered at home. Still, some sample general business expenses that will figure into setting appropriate entrepreneur rates are:
- Marketing Costs (Advertising and Promotional Activities, Subscriptions to Trade Magazines, Membership Fees for Trade and Networking Organisations),
- Office Supplies
- Computer Hardware, Peripherals, Software
- Training Costs to Keep Skills Sharp
- Telephone, Cell Phone and Internet Charges
- Business Insurance and Personal Health Insurance.
An entrepreneur that can value his/her time properly from the beginning will get plenty of customers and a business that pays well. Someone that sets prices too high will have customers that go elsewhere, and someone that sets them too low could end up working every hour of the day just to break even or even lose money.
The following three are some common mistakes many new small business owners make when setting rates that will bring a liveable wage and how to avoid them.
Mistake #1: Under-Estimating Small Business Costs
Any service business that underestimates expenses and how they relate to service industry rates will hit a brick wall eventually. Setting billing rates that are too low will make attracting good staff difficult in the future and thus attracting and servicing high-quality clients nearly impossible as the business grows.
A responsible small business owner will factor in every cost associated with running the business, from basic costs like rent and equipment to the many hidden costs of marketing and advertising.
Mistake #2: Believing People Are Motivated by Price
New business owners often believe that potential clients will only be motivated by price when making a decision to invest in services. As a result, the business rates they charge are designed to be appealingly cheap. This is an unmitigated trap and will just attract price shoppers looking for rock-bottom prices that don’t really care about the value proposition of the small business or the services being offered. These types of buyers will also be flighty and willing to leave at the drop of a hat when a lower price from a similar provider in the service industry is dangled in front of them.
The most successful businesses will be those that are able to sell the irrefutable, unique benefits offered by their services to clients so that clients will pay almost anything to gain these benefits because they can’t find them anywhere else.
Mistake #3: Giving Away Services Just to One-Up the Competition
Many new entrepreneurs give their services away without considering the consequences or what defines a sustainable rate for them – the amount they need to bring in to cover the costs associated with doing business and bring in some extra profit. They are blinded by the need to emulate or even one-up their competitors thinking this will help them earn the lion’s share of clients within the marketplace and get ahead faster. While what similar businesses are charging is certainly a factor in setting rates in the service industry, many newcomers to small business ownership misidentify their true competitors and end up emulating business models that are not sustainable for them.
To succeed, new businesses need to be able to properly identify the competition and then figure out the rates that will keep them in line with true competitors in their industry but also sustain them.
Mistake #4: Under-Valuing the Small Business
Entrepreneurs that set rates wrong don’t see the correlation between what their clients pay as hourly small business rates and the kind of salary package they can offer future or current staff. They don’t consider what an employer would pay for their time if they were not working for themselves.
Even those that intend to be one-man or one-woman operations need to realise they are doing all the work and thus should be compensated appropriately. They need to spend time researching job vacancies online and in the local newspapers to get an idea of the annual salary for a person doing their type of work at another company.