Chapter 5: Setting Prices
Part 1: What Your Prices Really Need to Cover
First things first: if you've ever worked a salaried job and done some back-of-the envelope calculations to figure out what your hourly rate was, you may be susceptible to one of the most common mistakes that new IT business owners make when setting their prices.
Sean Heilweil , cofounder and CEO of lead generation software company Exit Monitor , describes the problem like this: you come from a salaried job that, when broken down, pays you $X per hour. You assume that's the going rate for your services and so charge that rate when working with your first clients. But you soon find out you're struggling to pay all your bills (and taxes), and you've actually taken a pay cut.
The solution? According to Heilweil, it's best to sit down with an accountant or tax professional (maybe the one you met at the end of Chapter 4?) and do a different set of calculations:
- Determine what you want to net per year.
- Break that down into an hourly rate (note: you probably shouldn't assume you'll have enough clients to work 40-hour weeks right from the start).
- Factor in the additional costs you'll have to pay as a business owner (employment taxes, Social Security taxes, Medicare taxes, income taxes, etc.).
- Add those costs to your net earnings (this number will be your gross earnings).
- Break down the gross number into an hourly rate.
If you're thinking, "Hey, they totally glossed over the hardest part, which is knowing how much to factor in for employment taxes," good catch. We decided that was a little too technical to go into here, but if you're desperate to know how to calculate employment-related taxes for a sole proprietor, you're in luck: the IRS has a whole section of its website dedicated to tax resources for the self-employed .
But seriously. If ever there was a good reason to talk to an accountant, this is it.
Next: Part 2: Positioning Yourself in the Market through Price