How to determine the cost of doing business

7 min read
Marcus Couch

A frequently recurring problem seen in online service companies is that they have a full menu of services, but no idea of their true "ingredient" cost, the order of delegation within the workflow process, or even how to translate what the finished product should look like when delivered. Often someone will set their price for services based on what they heard someone else charges in the marketplace. This practice of "copycat" cost estimation is the main reason that companies go out of business, or never pursue their ambitions in the first place.

People are uncomfortable putting a price tag on their services.

To some, it’s an exercise in evaluating their own self-worth. But what I realized long ago is that the price I put on my services isn't what MY time is worth, it's what my customer's time is worth to them. When someone hires you, they have made the decision to delegate a specific task, milestone or goal to your care. More often than not, the reason they delegate is because they lack the time to do it themselves. The equation of pricing ultimately comes down to the cost of your time vs. the cost of your client's time.

Somewhere in the middle is where you make a profit.

Disclaimer: This content should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation. 

Find the floor

Deciding what you’re going to charge is often difficult, but it is necessary. You have to determine where you can make a profit, but also where you are priced in the marketplace so that your customers are willing to pay your asking price. The first step is to "find the floor" of your finances and determine the minimum overhead required for covering your basic expenses to survive. Certain costs have to be covered. You need to account for the cost of Internet, online tools and your own time.

Document the order of procedures

Does your local bakery toss every ingredient into a cake pan all at once and throw it into the oven? Of course not. Even if you have all of the ingredients, there is a specific order that things need to be prepared in for the finished product to achieve the same results each time. Even though you might use two eggs in a recipe, the steps are vital. (Oh, you mean I have to CRACK the egg?). As in a recipe, the ingredient list is only half the story. Knowing what order to add items and the cooking time is a vital part of the process. The same holds true for any service-based business. Documenting every single step along the way is critical.

When documenting procedures, the biggest mistake people make is taking their own expertise for granted.

What may seem like a two-step process to an expert might actually involve more than 200 incremental steps to complete. Here’s the best way that I've personally been able to document services:

  1. I  start by recording the screen while I’m working on a set of tasks.
  2. As I work, I might also speak into a microphone and provide commentary on what I’m doing.
  3. When I've completed the task, I play the video back and start to document each step within the process and estimate how long each individual step takes.

How many steps are there in creating a new Twitter account? Over a hundred. While it might seem like a small task, there are many things to do when signing up for Twitter. There are text elements that need to be created, graphics and account verification. When you list out all of the steps required on a granular level, you not only determine the time involved in the process, but you'll gain a clear understanding of the technical requirements involved.

Compute the cost of goods and services

Once you’ve documented all of the steps and assigned each task with an estimated time to complete, you've already done 80 percent more than most people in your industry. For those with physical products to sell, the price structure offers a clearer picture when covering your costs. Product pricing considerations include:

Material cost: If you’re making something, you need to consider the cost of the materials. For resellers, you will determine your pricing based on how much it costs you to purchase and store items. By creating a task list of the ordering and fulfillment portion of your workflow, you can also find out where things can be streamlined. In the case of selling goods, what can be drop-shipped from an outside supplier? Handling the logistics externally can take a lot of the pain out of the process and significantly propel your profit margin.

Cost of labor: When hiring internal help, you have to consider every cost associated with it -- including the extra, often unnoticed costs. These might include payroll, taxes, employee benefits, as well as insurance and other costs that come with hiring others.

Additional overhead: Running a business from your home office costs much less than office space. You’ll need to price your products or services at a higher rate if you have to cover the cost of renting office space, in addition to all of the utilities required to operate an office.

Use a project management system

Implementing a project management system like Basecamp, Teamwork or Central Desktop can dramatically increase your productivity. The ability to create a templated task list for specific jobs is a huge time-saver, and listing out all of the steps of a project in detail within a project management system gives you two immediate benefits:

  • You can easily monitor your workflow.
  • You can simply drag and drop a full set of tasks for each new customer project.

Setting up task templates allows you to "race against yourself" when doing a task for the second time. Because you know how long the task took the first time around, you can pick up the pace and try to get it done even faster the second time. This also provides an opportunity to look inward and consider delegation of tasks. What steps can be delegated to others so that you can concentrate on the hard stuff? What extremely difficult tasks can you do that set yourself apart from the competition?

Make use of dynamic pricing

We're all familiar with "surge pricing" with ride services like Uber and Lyft. When demand is high, the prices go up significantly. The same should be true about your pricing. A project management system will help you determine exactly how busy you are. When you’re in high demand, raise your prices! Find out what things can be delegated to others. The cost of having others do the work might be more expensive, so you have to account for the increased cost and pass that along to your customer.

The market and your competition

Once you have all of your tasks fully documented, your overhead costs will reveal themselves. Because you know exact requirements to get a job done, you've created a true product with the actual hard costs required to produce it.

The next step is to compare your base costs with what the competition is asking for the same job. Are your numbers close? Is your competition undercutting themselves so much that you can't compete on price? Don't waver on price just to seem "normal" according to the marketplace.

Price your services based on your costs, your goals and your own financial needs.

If your competition is still charging less than they should be and you find it difficult to justify your own pricing, determine what added value your services have over the competition. Is it turnaround time? Quality? Expertise? All of these can demand a premium price when explained to your client in full detail. Show your potential client all of the steps required to get the job done. Invite them into your project management system for real-time collaboration. Show them both accountability and transparency within your organization and you will have a decided advantage over the competition in your marketplace.