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5

Pricing

1. Price Quotations

Pricing is a very important part of your Internet research business. It determines how much money you are going to make, and also affects how much business you will get. If you price yourself too high, you will get very little business, if any, and thus make little or no money. If you price yourself too low, you may have lots of business, but you could be making more money. So you have to establish a price for your services that is good for you. You might even want to set a price range, because you may decide to charge different clients different rates.

Potential clients will always want to know the price of your services. In some cases you will quote an overall project price to them, and in other cases you will quote an hourly rate because you and the client do not know exactly how much work will be involved. Also, if you get annual contracts, the hourly rate will have to be stated in the contract. (For an annual contract you may want to give the client a lower rate than for a one-time project, and this is why you may want to consider establishing a price range.)

2. Overhead Cost Factors

The first thing you need to do to set your price rate is to work out your overhead costs. You probably will not get this right the first time, and you will probably change some numbers after you work out your first year’s expenses for your income tax. However, you have to come up with some estimates now because they will determine your pricing.

Work out your overhead costs on an annual basis. Each person’s situation is a little different and costs will vary accordingly. The following list includes some costs for you to consider:

• Home office usage: You probably will not rent an office to start with, but you will use a spare room in your home, a corner of the basement, or even your kitchen table. There is a legitimate cost associated with this. For example, if you use a spare room in the house, you can assign a percentage of the household costs to your business. The percentage may be based on the square footage of the room compared to the overall house square footage, or if it is one of six rooms, you can simply say it takes up one sixth or 17 percent of the household costs. The following list includes household costs:

• Rent or mortgage interest

• Insurance

• Taxes

• Heating

• Electricity

• Telephone (if you do not have a company line)

• Water

• Maintenance

• Security (if you pay for a service)

• Cleaning (if you pay for a service)

• Office supplies: You will need all of the standard items you have in an office, and you will have to buy them yourself for your company. Some of the office supplies will include:

• Printer paper

• Printer cartridges

• Company stationery such as business cards, letterhead, envelopes

• Storage boxes

• Desk tools such as staplers, hole punches

• Telephone: You may want to have a separate company line in your house. You may even need two lines — one for the telephone and another for the fax. Some telephone companies offer these two services on one incoming line, but with two telephone numbers. The second telephone can be connected to the fax and it can be distinguished by two quick rings while the other line has the normal telephone ring.

• Cell phone: You may just use an ordinary cell phone, or go with more capability such as the BlackBerry® or equivalent messaging system.

• Postage and courier.

• Office furniture: Usually you charge a percentage, perhaps 20 percent, each year as depreciation.

• Computer and peripherals: These are usually depreciated on an annual basis, but at a higher rate such as 30 percent.

• Software.

• Internet service.

• Website: As explained in Chapter 7, there are a number of expenses associated with having a website. These include the monthly or annual hosting charges, the annual registration charges, as well as the developing and maintenance charges.

• Research material: You will sometimes have to do research through sources other than the Internet, such as in a book on a particular subject that you will have to purchase. Also, to keep up-to-date in your specialization you may subscribe to certain magazines or newspapers. These are part of your cost of doing business.

• Transportation: The main cost in this category will be your vehicle, especially now with vehicle costs running in excess of 60 cents a mile, or 40 cents a kilometer.

• Advertising and promotion: You may not spend much, if any, on advertising. However, you will spend money on promotion, such as taking clients to lunch or sending them season’s greetings. These are all business expenses, but sometimes only a portion can be claimed as income tax deductions.

• Miscellaneous: There will be unanticipated expenses that do not fall into any of the above categories. At this stage, just take an estimate of what these expenses will be.

3. Salary Expectations

Next you have to establish how much money you expect to make. You can base this on the annual salary you made in your last job or on what you would like to make. If you use your previous salary, don’t forget to add something for unpaid company benefits such as health insurance. But don’t be greedy. Make your expectation realistic, because you do not want to price yourself out of the market.

4. Billable Time, Company Time, and Personal Time

Billable time is time you actually spend on a project, for which you can charge a client. Company time is time you spend doing work associated with your company that you cannot charge against a project or client. You will have to set up a system to keep track of both of these on a daily basis, as described in Chapter 13. Personal time is just that — time for holidays, sick days, or time off.

Your billable time will probably be very low at the start of your business, as you struggle to get clients. Hopefully the business will pick up and you will arrive at the happy state in which you are working on client paid projects most of your time. You should use this future percentage of billable time to establish your pricing, and at this stage you will have to estimate it. It would be great if your billable time was four out of five days a week, but in all likelihood it will be less.

Company time will be high at first as you sort out your administration procedures and generally get organized. You will also have to devote considerable time to promoting yourself to clients. Even initial marketing visits to potential clients cannot be billed, and so it must be counted as company time. In the first year you can count on spending a lot of your time and effort on company time, but it should reduce as your business gets going. Again, it is the company time you spend later on that you should use in your pricing calculations.

Example

As Mr. A was setting up his Internet research business, he visualized what he thought would be his future time allotments. He did his estimates for the three categories of time as follows:

Personal time:

He allowed for three weeks holiday each year, or 15 working days. He would also take off statutory holiday Mondays, Christmas, New Years, etc. These would total about 10 days a year. He estimated he would have to take off 10 sick days on average during the year. His total personal time for the year would be 35 days.

Company time:

He figured he would have to spend about one day a week promoting his business to get clients. In a 52-week year this would be 52 days. He also allowed a half day per week for administrative activities, or 26 days a year. Thus the total company time would be 78 days annually.

Billable time:

The maximum amount of billable time he could have would be the time available in the year less the allowed personal time and company time. With five “working” days per week, and 52 weeks per year, the available days are 260 annually. Subtracting from this the 35 personal days and the 78 company days, the maximum billable days he could have was 147 annually.

5. Markup Factors

Once you have calculated a basic charge-out rate or price for your time, like all for-profit companies, you may want to mark it up to allow for other factors. Companies usually do markups on a percentage basis.

5.1 Specialization

If you are offering a highly specialized and useful service that will save the clients time and money, you may want to add something to the basic price you calculated because demand for your service will be high. This could vary from a few percentage points to 10 percent or more, depending on how specialized or salable you or your company is.

5.2 Competition

Competition can affect your pricing. If there is little or no competition, you could take a chance and mark up your rates. If there is competition, you may actually have to reduce your price in order to get contracts.

5.3 Client understanding of personnel costs

You will run across some clients who will be shocked at your price because they do not fully understand the price of labor. Others, particularly in the service industry, will mentally relate your hourly rate with their own charge-out rates. Their rates could be very high, such as lawyers, or engineering companies, so if your rates are a fraction of theirs, they will not quibble with you. You may want to mark up your rates slightly higher for these clients.

5.4 Profit

Since you are a for-profit company, you may want to add a small percentage to your calculated price or rate, for profit. For example, 10 percent or 15 percent is very reasonable.

6. Overall Pricing Approach

Having considered all of the previously mentioned pricing issues, you can now calculate an official price or charge-out rate for your services. You should work it out for an hour’s service, although sometimes clients may want you to quote to them on the basis of an eight-hour day. The best way to explain the overall pricing process is with the following example.

Example

Mr. A went through the process of establishing his price.

Overhead:

He totaled his annual house costs, which came to $34,268. Since he would use the spare bedroom in his seven-room home as an office, he calculated one seventh of the amount as his office “rental” cost. This came to $4,895. He then worked through the list of other overhead costs, using utility bills and the like to establish the costs. For some he just had to make an estimate of the annual cost. The cost of these other items came to $4,977. His total annual overhead would be (4,895 + 4,977) $9,872.

Salary expectation:

In his last job he was earning about $58,000 a year, plus company benefits. He added $12,000 for the company benefits, and so his salary expectation was $70,000 per year.

Time calculation:

Mr. A’s time calculations are in the example in Section 4. He had arrived at the maximum billable days per year of 147.

Basic price calculation:

With his total overhead of $9,872, and his salary expectation of $70,000, his basic annual company income would have to be $79,872. This equated to (79,872 ÷ 147) $543.35 per eight-hour day, or about $67.92 per hour.

Markup:

Mr. A did not think his specialty warranted any extra markup. He did not know of any competition in his area, so he decided not to add or subtract anything for it in the beginning. Client understanding markup would depend on the situations as he encountered them. However, he did decide on a small 10 percent profit markup, or about $6.79.

Final price:

When he added the 10 percent profit to the base price he had calculated, it came out to (6.79 + 67.92) $74.71 per hour. He decided that his price, or charge-out rate would be $75 per hour.