First off - I don't look good in orange (actually, I do but saying so would defeat the purpose of the previous statement). This post is not about price fixing across companies. It's simply a thought starter on how to think about pricing your services if you're a small service provider. There are three major approaches (and one snarky one) I've come across (and would love to hear your thoughts on others):
1. "What the market bears" - this is simply calling around and getting rates from other providers of services similar to yours. Effective because it will keep you in line with the market. Ineffective because, let's face it, who wants to simply get "market" rates?
2. "You're as good as your last game" - if you've made the jump from corporate America to your own firm, simply take your TOTAL annual comp (base, bonus, benefits, etc.) and divide by 2,000 to get your hourly rate (250 work days/year X 8 hours a day). It's a good starting point but presumes your previous employer was paying you appropriately and/or that you were delivering enough value to warrant said compensation.
3. "The value you add" - do an analysis of how much economic value your services create and take an appropriate cut of that (10-20%).
4. "Spaghetti" - throw spaghetti at the wall and see what sticks. Said differently - chuck out an obscene number and see if the client bites on it. WARNING: THIS IS NOT A RECOMMENDED APPROACH!
I'd love to hear your opinion on other ways to think about pricing as an independent service provider.
- Mike Figliuolo at thoughtLEADERS, LLC
Monday, August 4, 2008
Ideas on Pricing
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As an addendum - I spoke with a colleague last night on this very topic. He had heard another good method: take your base salary, triple it, then divide by 2000. It's a good back of the envelope method that captures base, bonus, benefits, vacation, and "non-utilized time" for when you're doing business development. Thanks for the idea Jim.
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