How much should I charge?
It was March of 2019, and I was about to start my first business called “Window Cleaners of Brandon”. After working so many hourly jobs it was safe to say I had an “hourly mindset” going into this. I can remember starting out with 8 stores to clean windows for at a local mall, and mathematically it was amazing per hour. I calculated that I was averaging $33 per hour, and since my highest paying hourly job before that was $19.25 per hour then I had finally “arrived”. Just like the YouTube videos had shown me it only takes $300 of equipment, some soap, and a few towels to clean windows. If you’re reading this as an entrepreneur you’re probably already laughing, and if you’re reading this with an hourly mindset you may not realize the true cost of running your own business.
That $33/hr quickly turned into $38/hr as I got faster and more efficient. The problem early on though was these 8 stores every other week only provided me about 12 hours per month which isn’t much money at all. I learned early on that I needed to form an LLC, buy general liability insurance, and keep paying variable overhead like gas in my car, and new squeegee rubbers as an example. What I didn’t really know was how to get new customers. I tried talking to some other stores at the mall, and eventually 8 stores turned into 10, and then I started letting friends and neighbors know I’d clean residential homes also but no takers at first.
During May of 2019 a realtor was nice enough to refer me to clean windows at a house. Since I didn’t really know how to price it out, I bid about $125 for this big home that should have been closer to $300 inside and out. This is what people do whenever they’re new in business. They underbid almost every job at first because they’re desperate and afraid of hearing the word “no”. So, there I was with a little giant on top of my old rusted out 20-year-old Toyota Corolla car spending 5 hours on a Saturday because I still hadn’t done good at created boundaries around my work schedule to keep Saturdays off. I remember leaving that job feeling satisfied to earn $25/hr because I still had the “employee mindset”, and because I figured next time I can work faster and average $35/hr or better. That’s how the employee mindset works.
Fast forward some to March of 2020, and I was sitting down with a CPA do run my business taxes for the first time ever. Since I had paid $0 in taxes that calendar year, didn’t put myself on payroll, and didn’t have anything big to write off it turned into a wakeup call for me. That $33/hr I was so proud of part-time was actually worse than if I had worked a normal job. I mathematically would have been better off working for $19/hr. again at a job where I didn’t have to pay for marketing, materials, gas, and now taxes. Yes, work was picking up some with word of mouth spreading, but as long as I kept underbidding jobs it wouldn’t be worth continuing.
I want to pause my personal story right there and point out that one of the main reasons so many small businesses fail is being underpriced. Yes, I’m a consumer also and I don’t want to feel overcharged either, but the truth is if these companies don’t charge a reasonable amount, they will just become another statistic as they go out of business or realize a regular job is more worth their time. If you’re reading this as a newer entrepreneur, then I want to encourage you to come up with your own pricing that has nothing to do with your competition. Yes, you do want to be in the right ballpark, but please don’t copy someone else who may be going out of business soon.
Here’s a mathematical way to know how much to charge for a service business. Keep in mind these percentages are not set in stone, but just a ballpark example…
Marketing = 7-10% (if they don’t know you exist then don’t exist)
Fixed overhead = 20% (think insurance, vehicles, and software etc..)
Variable overhead = 5-15% (gas, equipment, uniforms, and whatever else)
Technician pay = 20-30% (the person in the field actually doing the service and their taxes)
Manager/admin = 15% (as you grow a team of 3-4 technicians, you’ll need a good admin/manager)
Retainer/growth = 5% (you need a minimum of 5% as savings for future growth or unplanned things)
Net profits/owner pay = 10%
The answer to how much you should charge is in these percentages above. If you have a $100 job to do and the technicians desires to earn $20/hr average, then we know this job needs to be 1 hour or less of their time including drive times. If you work alone, and wear every hat (technician, manager, and owner) then you can comfortably take home 50% of every job. That’s why solo workers can charge you less than growing companies can. If you have a team of employees, then you know by these percentages that you need to average $100 + per hour to keep the technicians pay at $20+ per hour.
The employee mindset thinks averaging $35/hr. is amazing because the only number they ever focused on is “technician pay”. The owner mindset can see that the business will die quickly at $35/hr. and actually needs closer to $100/hr. to even make a 10% profit that year. So, I encourage any entrepreneur reading this to do the basic math, and figure out what’s a fair amount to charge for your product or service? What are some ways you can be more efficient so as you work a little faster you can also charge a little less? If you raise prices to where you’re out of the ballpark of competition it won’t work, but if you undercut the prices of people who are going out of business next year that also won’t work well for you. Focus on adding more value than others, and charging what you’re worth. The right customers will pay a little bit more for the company that’s professional and does great work.
