Why not correctly valuing your services could be costing you
Matt Byrne
Director
Summary
Are you charging what your worth?
If you don’t know the answer to that and haven’t taken a calculated approach to price setting, then this article is for you (spoiler alert: you are likely worth alot more than your charging!)
If you’re out there doing great work, you deserve to be paid for it (all of it!). We discuss potential reasons why you aren’t being paid what you’re worth and why you need to change your approach.
A lot of the businesses we work with were started by someone that had a particular skillset and had the motivation to turn this into a business. Most of them aren’t ‘business people’ and haven’t run a business before but they’re very good at what they do.
When they start the business, they just want to get runs on the board and so they often take whatever work is available at whatever price is needed to win the work. That price is usually at a discount to the market value of the services.
The trap that a lot of business owners fall into is to continue to charge those discounted rates despite the fact that they now have years of experience, higher costs and provide better value.
We see it time and time again where a business owner is working 60 hours a week and making about the same amount as they would have had they been an employee (or sometimes less!). It’s usually pretty clear from the financials and the conversations we have with our clients that the work being put in isn’t reflected in the revenue.
As a business owner, you need to be rewarded for the risk you take on and the time invested to grow your business. If you’re not, it would be easier and less stressful to just get a job. But before you throw in the towel, let’s have a look at some strategies to improve revenue without needing to put in extra time.
There are a couple of potential reasons why you aren’t being paid what you’re worth:
- You’re not charging out your time at the right rate.
- You’re not recovering all the time you put into the job.
Let’s deal with each of these separately.
Not charging your time correctly
Undervaluing the service you provide is particularly common in service based business. There is a bit of imposter syndrome that comes in when you first start trying to charge your time out at $100/hr, $200/hr or even $500/hr. Regardless of how good your service or product is, it can be daunting putting forward a proposal with a high dollar value and business owners often take the easier option and they discount their pricing.
An easy(ish) way to increase your revenue is to simply charge your services at the market value. Now this doesn’t mean increasing your prices for the sake of an increase. What I’m referring to here is to align the amount you charge with the value you provide.
Unsurprisingly this is often met with some hesitation from the business owner. This comes from the fear that they will lose customers and not be able to win enough new work on the updated pricing.
It’s at this point we start talking about how vital it is that the founder properly values the services they are providing so that even if they are met with some pushback on price increase, they can stand their ground and be confident they are charging correctly.
Here are some of the key reasons you need to value your services correctly:
One
You need to be rewarded for the risk you are taking on. If you could earn $100k as an employee and that’s what you’re currently pulling out of the business, it might be easier to just get a job. After all, there are limited risks being an employee and far fewer stresses. You need to be earning a premium in your business to compensate you for the risk and the stress.
Two
The business is funding your retirement. One day you’re going to hang up the boots and you need enough money to live on in retirement. Your business needs to produce enough so you have an asset to sell, you can put money away into super or fund investments that earn you income.
Three
If you’re not charging correctly, this is directly impacting the valuation of your business and by extension your ability to borrow money.
Four
Valuing your services means you’ll make more money from the same time investment. If you increase your prices by enough, you could even reduce your hours getting more time back for your personal life.
Not recovering all your time
Service bases businesses, including trades, often quote on expected time the job will take. If you estimate a job will take 10 hours but it actually takes 15 then you’re potentially doing 5 hours work for free if you can’t recover the additional time.
Either, you need to improve quoting or you need a mechanism to recover the additional time.
Quoting is often a bit of a guessing game but with the right data from historical jobs, you can make more informed decisions. For example, let’s say a plumber has done 10 kitchen sink installations in the past year. Each of them were quoted for 2 hours work but on average the time was 2.5 hours. Over the course of the year that’s 5 hours of lost time. If the plumber was tracking their time across each job, they’d have the data to know that on average, that particular type of work took longer. Going forward they can quote based on the historical time and are less likely to have overruns.
If you’re taking on a new job and you’re not sure what time it will take, consider quoting with a range or build in a buffer.
Now, no job is perfect and when the inevitable doozy of a job comes along, you need room to be able to recover the additional time. Taking the plumber example from above, let’s say they are quoting on 2.5 hours to complete the install but upon inspection they find out that the existing waste pipe isn’t the right diameter and needs to be replaced (that’s the extent of my limited plumbing knowledge!). To replace that pipe will cost $20 in materials and an additional 1 hour of time. It’s not the plumber’s fault that the waste pipe wasn’t up to code so the plumber needs to recover that time from the client.
Going back to a client to ask for more money can be daunting for some so they just wear the cost and move on. Here are some tips to make that process easier:
One
Make sure your quote and your T&Cs allow you to increase the price for unforeseen circumstances and make this clear when sending the quote to the client.
Two
Your quote should also be clear on the scope of works and any disclaimers.
Three
If the price changes, communicate it early and clearly. It’s no good sending a larger invoice at the end of the job without giving the client a heads up. It’s best to communicate it as soon as possible and be clear about why the change has arisen and what it’s going to cost.
Four
If possible, provide the client with options. For example, we sometimes get a client accounting file that is a bit of a mess and needs some cleaning up. Now we could tell the client it will cost $X for us to clean it up or we can say that we can do it for $X or you’re welcome to do it yourself and we can provide guidance for $Y. Often they’ll be happy to pay us to do the work but it gives them the control.
Five
If you’re not sure what the additional fee will be, you could provide a range and then agree different intervals that you’ll provide updates on. For example, if you’re not sure how long some work will take, you can give a broad range and then update at $2,000, $5,000, $7,000 and so on giving the client an update on the progress that’s been made and a more accurate estimate of final price as you go along.
In Summary
- Gather data such as timesheets and other costings on historical jobs so you can improve your quoting or estimating process going forward.
- Build in a buffer or quote with an estimate if you’re not sure how long it will take.
- Allow room for unforeseen circumstances or scope creep.
- Communicate changes in pricing clearly and early and provide options where appropriate.
Final Thoughts
If you’re out there doing great work, you deserve to be paid for it (all of it!). If your revenue doesn’t reflect the effort you’re putting in or you’re missing your targets, it’s time to have a look at how you’re pricing your services and whether you’re recovering all of your time.
If you need help with that exercise or just want a sounding board, reach out to the team at Day One Advisory.