Running a business is a matter of ins and outs.
‘My other piece of advice, Copperfield,’ said Mr. Micawber, ‘you know. Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and – and in short you are for ever floored. As I am!’
Go back to Bed
A good friend and fellow designer told a story whilst she was giving a lecture recently to a bunch of women hoping to make a business out of design.
She had a project where she worked out that it would have been cheaper for her to stay in bed all day for six months and write a cheque to the client for £5000, than it was to do the job the way she did it.
This led to the term “Get out of Bed Rate”.
Stage 1, the Cost of the Organisation
Look at the job you have to do and work out all the costs associated with it. These will include a proportion of your overheads, and the actual costs of all the people involved.
The best way to be honest about all your costs is to look at the last years expenditure for each type. Leave out any staff salaries for now, we’ll do them later. Look at rent, heating and lighting, equipment servicing, phones, faxes and stationary, insurances etc. Take the list off your profit and loss for last year. Don’t have a profit and loss? You’ll be telling me you don’t have a cash flow forecast next!
If you think any of the costs will change over the course of the project, adjust them to produce a forecast for the coming year. These are your annual overheads. Divide it by the number of working hours in a year (1700 is a reasonable number, if you work 37.5 hours a week as everyone should) and that gives you the money it costs to run your business per working hour. If there are several of you, of course you can all share the cost between you, but more of that next.
Stage 2, the Cost of the People
So what about staff costs? If you pay anyone to do work for your business, take their salary and all the costs of employing them (your contribution to their National Insurance, any bonuses, agent’s fees, etc) and divide that by the 1700 hours.
Divvy up your overhead hourly rate amongst your staff and you can work out the cost of any job according to who will do it, using their salary + overhead hourly rate. Call it a COST RATE – there is NO PROFIT in it.
I bet it’s more than you thought it was. No cheating! Remember, for any less… you might as well stay in bed.
Stage 3, the Cost of the Job
Now you can work out how long it should take you and your people to do the job and multiply this by your cost rates. This is the amount of money you estimate it will cost you to do the job.
You then need to add for contingencies (think of the worst that could happen, factor in lean periods) and profit and agree your fee. You know how much it will actually cost to do the job, this is your Get Out Of Bed Rate. Any fee smaller than this, you might as well all stay in bed. Agree your fee from a position of informed confidence. How much value do you add with your work? What do you get out of it?
But it doesn’t end there.
Stage 4, the Real Cost of the Job
Whilst you are doing the job, keep an eye on the clock. Are you far enough along the process right now? Is it taking you longer than you expected? Revise your forecast to tell you how long (and how much) it will now cost you to do the job. Are you getting close to your GOOBR? Now you are in the correct position to make an informed decision. Ask for extra money, or pull the plug.
Or you could just go to bed and send the client a cheque of course.
And what of my friend? I will spare her blushes. Needless to say she’s pretty well off these days!
David Winch says
This is all cost-based pricing, and there at least 30 things wrong with cost-based pricing!
Cost based pricing is intrinsically adversarial – Client wants a quick fix; service provider wants a slow fix – and is therefore Win-Lose!
Using Value-Based Pricing, the Provider’s best interests and the Client’s best interests coincide. It is non-adversarial; it is Win-Win; it is ethical, moral, legal and honest. There are at least 30 things right with Value-Based pricing!
Value-Based pricing results in Clients saying, “That’s a bargain! How soon can you start?” and Providers simultaneously thinking, “That’s highly profitable!”
Oh, and the conversion rate from proposals to engagements grows by up to half as much again!
Contact me to learn more.