The Price is Not Right
Throughout my career, I have unfortunately encountered a lot of circumstances where businesses or individuals undervalue their services. If you have ever wondered about your pricing, I want to break it down with a simple formula.
Revenue = All Financial Obligations + Owner’s Pay + Net Profit
In other words, the amount of revenue you generate should cover all your financial obligations including the owner’s pay and provision for net income. Anything short of this signals a potential problem in your pricing, and it should be reviewed.
In my pricing formula:
Revenue is a function of your price and quantity sold
All Financial Obligations includes expenses and non expense payments
Owner’s Pay includes the owner’s draws in excess of their salary expense
Net Profit should be at least 10% or whatever your industry gold standard is
During your pricing review, consider the Net Profit and Owner’s Pay to be fixed; in my opinion those are non negotiable. So the two variables in this equation are All Financial Obligations and Revenue. Make the necessary changes in the formula so that you can achieve a price that works for you.
The bottom line is regardless of what pricing model you use, your revenue generated should cover all your financial obligation, draws and net profit.
If you are a consultant, freelancer or hourly worker, I have a simple worksheet to help you determine your hourly rate. Click to Download