E. James Burton is Dean of the Jennings A. Jones College of Business at Middle Tennessee State University in Murfreesboro, TN. He holds a Ph.D in accountancy, as well as an MBA. His books include Total Business Planning, Accounting and Finance for Your Small Business, and Sales and Operations for Your Small Business, all published by John Wiley & Sons.
Q. I am planning to start a computer consulting business. How do I determine a price for my services?
A. First for the easy answer: The price you will want to charge is somewhere between the ceiling price -- what the market will bear -- and the floor price, or, the lowest fee you can charge in order to make a profit.
But determining your floor price takes some work. Start with an objective, well-researched estimate of your total business costs, including the cost of your own time. Then, determine what this figure is per week (or month), and divide it by your estimate of how much you can bill, using whatever method -- for example, hourly, daily, per project -- you choose. The answer should be your the floor price.
If you're tempted to drop below the floor price to increase your volume, repeat these calculations. Unless a price reduction can produce a substantial increase in business, you will only dig yourself a debt hole. And, you may make it difficult or impossible to raise your prices back to a reasonable level.
At the same time, probably the single most important factor in determining your price will be what the competition charges. You must study the market carefully. If your services are just like those of your competitors, then your pricing will have to be about the same. To charge more, you need to differentiate your service on the basis of such features as speed, quality, or location, so the customer perceives additional value. Then, you'll be able to move your pricing closer to the ceiling -- just where you would like it to be.
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