How much should I quote this new client?
Giving accurate price quotes is sometimes seen as an art – some business owners seem to be charging unreasonably high and still have a full roster of clients, while others struggle to break even at the end of each month.
Their secret? They rely on science as well, when figuring out what to charge.
Small Business Pricing Strategy 101
When you are a product business setting prices is relatively simple. You can apply a standard formula:
Product Cost + (Cost x Markup Percent) = Selling Price
Service businesses, offering “packaged” services often follow a similar approach to pricing. Here’s how you can do the same.
First, you should estimate the average cost of providing a certain service for you as a business. Let’s take logo design as an example.
Typically, you spend 1 hour on client talks – gathering requirements, researching their niche and identifying their preferences. Than you need 2 more (productive) hours to draw 3 logo variations, and send them to the client. Revisions (when needed) usually require anywhere between 15 min to 1h 30. Apart from that, you also need to pay $60 for premium fonts.
So this rounds up to roughly 3 hours of your time. Meaning that the bare product cost equals: 3 x $55 (an hourly rate you’ve come up with) + material costs or $225. But don’t rush to put that number as a price quote. It’s just the bare minimum to give you a ballpark figure.
As now comes the interesting part – “brand markup”.
You know that most retailers do not sell their goods for wholesale – the cost of manufacturing that chair, growing that apple or sewing that piece of garment. As a rule of thumb most will add at least a 50%markup. Luxury brands will add even more “padding” on top. Companies catering towards price-sensitive consumers will aim lower and so on.
As a service provider you should be adding a markup as well. After all, just like any retailer you also have overhead business costs to cover – marketing, accounting and so on.
The markup percent is totally up to you to decide. Though there are different factors you can take into consideration when determining it:
Closest Competitor’s Pricing
There’s no point in benchmarking yourself against some “big name” agency doing work for the likes of Nestle. But you should not compare yourself to some beginner shamelessly low-balling their prices either. Try to find a peer based in the same area as you are; with similar qualifications and see what they charge. Alternatively, google for a rates database in your niche to get some ballpark estimates.
Your Client Positioning
Clearly, a small business does not carry the budgets of an international entreprise. But dealing with a “small guy” will probably require less “consults” and you will get paid faster. Entreprises are notorious for having long billing cycles. Adjust your pricing depending on what kind of clientele you want to attract – big corporate wallets, nimble hip startups or heartwarming mom-and-pop stores.
The Value You are Providing
Sometimes offering “per deliverable: pricing isn’t wise per se. Think about the team who invented the famous “Just Do It” slogan for Nike. If they were paid per word (as a lot of writers like to charge), they would have walked away with pennies. So when determining your pricing, think about the possible value/ROI your service will generate for the client’s business e.g. a memorable logo will increase their brand awareness and attract more customers (=$$$).
Consider Tiered Pricing
For those who just cannot come up with a good enough price markup (or total service price), this is the best move. Create two or three distinctive pricing tiers to appeal to different client segments. Bonus: this turns a potential “yes/no” decision for clients in a “either/or” one.
In a nutshell, that’s how you can create price quotes for “productized services” – the standard, one-off or retainer tasks you have on your client “menu”.
Now comes the tricky part – giving price quotations for custom, large scale projects. Realistically, just a fraction of clients approach businesses or freelancers with a well-defined scope of requirements.
Most just pop in with requests like “I need an eCommerce website done” or “I need catering for a 100 ppl event next month”. Clearly, there’s a lot additional information you will need to get from those folks to understand what is it that they need. For instance: appetizers or full-meals including deserts? Drinks? Veggie-friendly options? Do they need staff for the event? How many people for how long and so on?
And that’s exactly when estimating and quoting comes into play.
The Difference Between a Quote and an Estimate
When you cannot immediately put a dollar value on the requested scope of services, you will need have to provide a price “guesstimate”.
An estimate is a broad, preliminary number that you give to the client before you know all the details about the expected amount of work. It’s perfectly okay to give just a baseline figure e.g. “WordPress web development starting at $1,500 per website” or “photography services starting at $50/hour minimum 3 hour booking”.
A price estimate is what you include in your project proposal. And it’s alright to change the estimate number (even drastically) when you receive further information from the client. In fact, your job is to scoop as many details as you can beforehand to give a definitive price quote.
A price quote (or quotation) is the exact payment amount that will be due once the job is done. It is a fixed number that is rarely subject to change after the client accepts it. The only exception is if the client changes the scope of work mid-project, but again – try settling all the details beforehand to avoid:
- Dealing with the scope creep for the sake of “satisfying” a client;
- Delivering less than stellar service or providing poor customer experience due to the fact that the client didn’t properly understand what your service entails (and what’s not included).
So it’s better to over-communicate your price quote and provide a very detailed breakdown of all the things included, as well as your payment terms.
Also, mind that price quotes formally stand for a contract between you and your client. They can be used as legal standpoints if a dispute arises.
So the recap, the main differences between a quote and an estimate are as follows:
- Estimates provide a baseline idea of your price. They should guide the buyer. Price quotes are conclusive. It’s a legally binding number that already accounts for all the costs involved.
- Do not label “estimates” as “quotes” and otherwise. Always ensure that your client clearly understands whether they are receiving just an estimate or a quote.
Now, as we are on the same page term-wise, let’s move on to a few more tips on how to make quotations for different projects and services.
3 Essential Tips For Giving More Accurate Price Quotes
Here are few essential tips to help you fine-tune your pricing structure and give better estimates and quotations for the “complex” projects heading your way.
1. Calculate Your Minimal Rate
Do you know how much you need to charge per project/hour to break even by the end of the month?
Surprisingly, most freelancers don’t and, as a result, end up struggling with the “feast and famine” cycle. So let’s change that, shall we?
When determining their prices, most will only factor in the business expenses. But that’s somewhat inaccurate as you kind of need a “salary” to pay the bills, buy groceries and enjoy the good life, eh? So let’s account for them as well.
So, your average monthly expenses are $2,000 (rent, utilities, food, personal spending etc) and your business expenses are $500 (software costs, equipment, stationery etc).
On top of that, you have taxes (20%) due every year. So basically, to break even you need to bring home net $3250 (net = after all banking/payment processing fees that can add up too).
So this is the bare minimum you need to make in order to thrive. If you set your hourly net rate to $25/hour , you will need to bill at least 130 hours per month. Doesn’t sound that much? Well, have you thought about the next point?
2. Factor In Non-Billable Hours
As mentioned already in the “logo design” example, your final price should include the so-called “non billable” hours – client negitons, admin work, invoicing and all the email back-and-forth throughout the project.
Face it, even a “simple” task can take you hours to complete if the client demands constant hand-holding or chooses to micromanage you and “review” every step you take. Or if you are just lacking the motivation and feel overwhelmed with other business chores e.g. getting a better grip of your cash flow.
In any case, 99% of the time you will be underestimating the time it will require you to complete a certain project. So add-up some “padding” on top of your price quote to make sure that you are not spinning your wheels at your own expense.
Give an honest assessment of your own capabilities and create a quick breakdown indicating what exactly you will need to do to complete the job and how much time each activity will take:
- Schedule a client discovery call//consult – 1h
- Finalizing requirements and emailing – 1h.
- Client’s niche research & moodboarding – 2 h
- Landing page design work – 5 h
- Copywriting – 4h
- Revisions – 2h
- Post project wrap-up/invoicing/accounting – 1h
Now add-up all those hours, apply your average hourly rate and compare the new number to the one you originally planned to quote.
And those are just the hours related to client work. But you have more business chores that no one’s paying you to do – taxes, marketing, website updates and so on. Even if you are committed to working 40 hours/week, at least 30% of your hours go towards miscellaneous non-client activities.
3. Double Your Resentment Rate
This brilliant tip comes from Ramit Sethi.
Considering that you have already figured out the bare minimum you can afford to charge per hour + guesstimated how many non-billable hours you usually end up having, you now have a good idea of how much you can afford to charge per hour.
Let’s say you’ve settled on $35/hour.
You can also afford taking on projects for as little as $15/hour. In this case, no ones covering your non-billable hours, so you will need to take on more gigs.
Those $15/hour is your resentment rate – the absolute lowest amount you will work for, but probably hate doing that work because it’s paying pennies.
So double it. Solemnly swear that you will never-ever agree to work for less than $30/hour or $150 per small, one-off project.
Remember to thank yourself for this decision at the end of the year for this, when you are reviewing your business income.
Setting up your prices is never simple. So remain flexible, and adjust your quotes on a case-to-case basis. Experiment with different “brand markups” and see how that impacts your business bottomline.
And if you ever need a professional looking template that will give your business even more oomph, check out our invoice freebies.
Photo By Acharaporn Kamornboonyarush.