Pricing a Service

Step 1. Figure billable hours

Very few people can work and bill for 365 days per year. Actually, you're lucky if you bill half that time. You must subtract time for the following:

Time off
Weekends, holidays, vacations and sick days
Marketing
To sell the service to prospects (new business owners may spend about half their time in marketing the first year; many existing businesses spend about a day per week)
Training
To improve services and stay up with current trends (can take a day per month)
Administration
Invoicing, paying bills, dealing with suppliers, finding equipment, etc.

For example if a bike shop owner offers repair services in addition to retail items, he could make the following calculation to figure the rate per hour of his repair person:

Potential hours (52 weeks x 5 days per week x 8 hours per day)	2,080
Less: holidays, vacation, sick time and training (5 days each) (20 days x 8 hours per day)	(160)
Less: administration, shop cleanup, ordering parts, time on the telephone, customer service (49 weeks x 5 days per week x 2 hours per day)	(490)
Less: marketing	(0)
Total billable hours	1,430

Step 2. Figure billing rate costs.

You must include the following:

Salary: Should be comparable to wages the person would be making working in the same type of job for someone else (given the same skills and experience)
Mandatory benefits: Employment taxes (Social Security, unemployment-both federal and state, worker's compensation); average 14% of salary
Retirement: Average 10% of salary
Insurance (health, life): Average $100 per month

Other overhead costs include the following:

Advertising (Yellow Pages, newspapers, and trade journals)
Business and professional meetings (lunches, room rentals, and taxis; any direct cost should be billed to the client)
Car expense (actual, or .31 [1996] per mile)
Depreciation on equipment (e.g., if it will last 5 years, then 20% of the price)
Dues, publications, professional fees
Education and training
Insurance (fire, liability, malpractice)
Interest (if you borrow)
Professional fees (accounting, legal, financial)
Printing (brochures, stationery)
Rent (allocate even if you use your home)
Repairs and maintenance
Secretarial services
Supplies and postage
Taxes (real estate and personal property)
Telephone
Travel expenses
Utilities
Other

The bike shop owner's total estimated overhead was $45,000. He made the following calculation of billing rate costs:

Salary of repair person ($180 per week)	$9,360
Benefits (14%) and employment taxes	1,310
Retirement	0
Health insurance	1,200
Amount of total estimated overhead allocated to repairs, based on square feet ($45,000 x 20%)	9,000
Total cost	$20,870

Step 3. Figure out minimum hourly rate.

Cost + 10% (for profit) divided by your number of billable hours will yield your hourly rate.

The bike shop owner made the following analysis:

Cost + 10% for profit	$22,957
Billable hours	1,430
Minimum hourly rate	$16.05

He then called several bike shops in the area and found that their rates were from $15 to $25 per hour. Thus, the owner decided that $16.05 per hour was the rate he was going to charge.

Each year Dun & Bradstreet examines, in detail, the major reasons for business failure. Emotional pricing is at the top of the list! So hold onto your excitement and optimism, but let pencil and paper set your prices.