Pricing Your Service

business advice clients economics lash education lashecon

 

How to calculate the optimal price for service

When it comes to work, we all have certain expectations as to remuneration we are going to have for a specific amount of work completed. It can be a yearly salary, wages per hour, or amount of Net income, if you are self-employed. If with salary and wages it is easy to understand how much you are going to get at the end of each pay period, it is much more complex calculations when it comes to self-employment income.

 

For those who never thought about it and also did not take finance classes, I am going to explain every aspect of it in this post. We are going to start with an understanding of basic principles.

 

Let’s also have an example, for easier understanding:

 

Lisa is a beginner lash artist. She took a couple of classes and became good at her work. Now she needs to price her service. She wants to make 2000CAD per month, work 5 hours per day 5 days a week. In other words she wants to make about 20$ per hour. She knows that on average a Full set of lashes takes her 2 hours. Should she be charging 40$ for the full set then?

 

The answer is of course NOT. First of all we need to understand what else should be included in the price, look at Lisa’s competitors, and find the minimum price level point.

The minimum price level is the price at which the service provider is making enough to meet the expenses and get the desired income. Going lower than such price simply doesn’t make any sense.

 

We will start with the analysis of competitors and here we will also try to understand if Lisa has any competitive advantage over her peers.

 

Name

Lisa

Philippa

Anne

Jane

Price

40

50

85

100

Location

close to subway

suburbs

central

central

Education

professional education

none

professional education

professional education, over 4 years of experience, educator

Extras

separate room for service, free parking.

works from her kitchen

rents a room in a beauty salon, scheduling is done through a receptionist

owner of the studio, receptionist, coffee/tea in the waiting area, aftercare kits

 

 

Looking at this small table, we already understand that Philippa is not a competitor for Lisa, and Lisa has a competitive advantage over her. Which means that Lisa should not set price as low as 50$. Anne and Jane are both conveniently located in the central area, however, Lisa also located in a well accessible area and has a free parking spot for clients. Of course Jane has a competitive advantage over the rest, and we shouldn’t be trying to set prices as high as hers, however having her in the table gives us an idea of the highest price that client is willing to pay for the service. Now we know that Anne still has some competitive advantage over Lisa, but we know for sure, that Lisa can charge any price between 50$ and 85$.

 

Realistically such analysis will give a fuller picture if the amount of the competitors taken into consideration is anywhere between 3 and 7. Variables used for the research can be different from the ones offered in the table, for example :

  • Price;
  • Discount Policies;
  • Amount of people working;
  • Working conditions etc.

 

The thorough analysis should show your real competitors, your competitive advantage, and explain why people are dumping prices.

 

What to know in order for the business not go bankrupt

This brings us to the next point, setting the price accounting for the costs involved. A lot of the times new entrepreneurs do not realize how much cost is involved in their business and unintentionally sabotage the accepted pricing by charging less.

 

Here is a list of costs that you should account for:

  • cost of materials used per client ( for example, glue price is 70$ it lasts 1 month and Lisa can use it on the maximum of 50 clients per month. Thus cost of glue used per client is 1.4$),
  • rent ( total amount should be divided by a maximum number of clients per month or rent per day approach can be used. Example: Rent cost is 600$, Number of working days per month is 20, Rent per day will be = 600 / 20 = 30$ per day. If Lisa takes 2 clients per day, the cost of rent per client is 15$)
  • amortization of equipment (lamps, beauty beds/chairs, etc.)
  • gas, electricity, hydro bills (same calculation as with rent)
  • cell phone bills (same calculation as with rent),
  • license fees (same calculation as with rent),
  • insurance (same calculation as with rent) ,
  • cost of accountants and lawyers (same calculation as with rent),
  • cleaning fees (same calculation as with rent),
  • salaries and wages.

If you do not have the associated costs such as accountant and lawyers, you may want to account for the price of the next course that you want to take. If you are driving to work, the cost of gas and parking should be taken into consideration as well.

 

What to consider before setting the price

Another thing that should be considered is the value that your service has for a client. Knowing your ideal client, you should also have an idea of how much she values the service that you provide and will she be willing to switch to your competitor if the price is too high.

 

Let’s look at the example:

 

Now Lisa knows that on average she will be spending 30$ per service per client. So she decides to charge 80$ for service. Her client Mary tries the service for the first time and likes the work that Lisa did, however when she arrived Lisa was finishing up with a previous client. Mary had to wait in Lisa’s living room, even though it was clean, Mary felt like she would rather pay an extra 5$ and go to Anne next time, the place that Anne works from has a waiting area and the receptionist is offering coffee or tea while clients are waiting.

 

A combination of all the things mentioned above should give you an idea of how to set the right price for the service. The cost analysis also may help you to get rid of any unnecessary spendings at this moment, using the same approach you can decide whether you need to invest in something or set it aside for later.

And remember never provide service that will make you lose money.

 

If you have any questions or would like to add something to this post, please leave your comments below.

 

I hope you stay healthy and safe!

Mariia

 


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