Small Business Profit: Are You Undercharging?

Undercharging can hurt your business. Here are seven ways to tell whether or not you're undercharging and what to do about it.

Many home businesses sabotage their own success by chronically undercharging for their services. They are stymied by the deathly fear that clients will simply take their business elsewhere or cut back on what they purchase. How do you know if you’re charging too little? See how many of the following seven points apply to you:

1. Fringe Benefits and Overhead. Figure out what you were — or would be — making per hour as an employee, then multiply this figure by about two and a half to cover your fringe benefits, overhead, expenses and profit. Another way to approach it, according to home business consultants Paul and Sarah Edwards, authors of “Secrets of Self-Employment,” is to identify what you would like to earn annually. Divide this number by about 2,000 hours per year, and then multiply this figure by two or three, “since you won’t be able to bill for all 2,000 hours,” they stress.

2. Business and Living Expenses. If there’s too much month left over at the end of the money, then yes, your costs are up. Check your business expenses carefully — which implies keeping careful records for your own use, not just the IRS — and see where they’ve increased and by how much. If your fees don’t go up to match increases in business costs, you need to be prepared to watch your income go down.

3. Your Competitors. If you’re the lowest-priced in your field you may want to adjust rates. Find out what others are charging, through informal surveys, trade and professional associations, or word of mouth. Not only do customers avoid the most expensive, they also avoid the cheapest vendors.

4. Price Haggling. Do clients fall all over themselves to agree to your prices? It’s time to start quoting higher ones.

5. Growing Reputation. If you’re not the new kid on the block anymore, your time should be worth more. As you build a steady backlog of satisfied customers, new prospects will pay more to be one of them.

6. Value-Added. Are you using better technology than at this same time last year? Your prices need to reflect that.

7. Economic “Feel-Good” Factor. If the whole economy’s doing well, prices can go up since people are buying more than they did during tough times. These days the economy’s certainly on a roll. Holding prices steady makes sense when no one else is raising theirs, but in a bull market all prices go up.

How did you rate? There’s no magic magazine quiz number here, but this should give you a clear idea if you’re charging too little. Quote higher prices until you feel resistance, but chances are you’ll be surprised at how much you’ve been cheating yourself.

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