How to choose a business structure
There are many great things about running your own business, beyond the freedom to choose what you do and even beyond the pleasure of working in your slippers.
Getting money into your bank account may not be why you got into business, but there’s a certain satisfaction in getting paid for a good day’s work. While doing that good work may be your strength, many small business owners cringe at the thought of having to ask for payment.
Setting up a pricing strategy for your business (and sticking to your guns!) needs to be done right, so here’s an overview of your small business pricing strategy options.
If you’re a product-based business, this is probably the most straightforward pricing strategy for you. You order in stock, place a reasonable margin or mark-up on that stock, and then sell it to your customers. Watch out for discounting – if you’re planning to discount your products or have regular sales, make sure you’re not costing yourself money by completely cutting out your margin.
This pricing strategy isn’t a case of ‘set-and-forget’ either – you should be reviewing your expenses and recalculating your margin at regular intervals to make sure you’re still turning a profit.
An hourly rate is often the simplest pricing strategy for a service-based business. Rather than just working out what you were paid in your last job, adding on a ‘bit’ and going with that, it’s essential do your research and work out what others in your industry are charging. However, this doesn’t necessarily mean you should copy what they’re doing, particularly if you want to use pricing as your point of difference.
It’s common for businesses to charge an hourly rate – think painters, electricians or even lawyers.
Charging hourly is similar to charging by expenses and margin, as no matter what you do, your business will have expenses. Don’t forget to factor in tax and GST – it’s quite likely that you’ll take home far less of your hourly rate than you might think.
You will need to sell your hourly rate with confidence, so make your calculations and then back yourself 100%. If you’ve got no idea where to start, there are several online calculators like Finder.com.au’s Freelance Hourly Rate calculator.
Rather than valuing your work by the number of hours it takes to do (which essentially rewards you for taking longer!), fixed-fee projects are priced based on the value of your work.
Fixed-fee projects might suit businesses who provide a measurable amount of value and a definite outcome, like an event planner, marketing consultant or a hairdresser.
When setting up a fixed-fee project, make sure value is the emphasis of your proposal – what does it mean for the client? It’s always good to estimate how many hours you think the job will take (and factor in your overhead costs) as part of constructing your fixed-fee pricing – then don’t forget to check in along the way to avoid time or expense blowouts.
For a service-based small business, this can be the ultimate pricing strategy, as retainers provide a reliable source of recurring income. The idea of a retainer is that you provide a set number of services on a regular basis, and you get paid every month (or week) for providing those services or for providing expert advice when needed. Think of it like a gym membership – you just automate the payment and then it’s up to the client to take advantage of the service!
Relying on retainers can help you to build a strong small business, with less of a ‘feast or famine’ roller coaster to ride. Don’t forget to set out clear terms and conditions in a written agreement with your client, so both parties are on the same page.
Getting your small business pricing strategy right is a tricky thing, so don’t be afraid to take the time to work out what’s best for you and your customers – they’re the ones paying the bills, after all.