How to Price Your Service

The Mind 🧠 of a CFO

Read Time: 1:40 minutes

Welcome to The Mind of a CFO newsletter. The newsletter is designed to help entrepreneurs grow in business πŸ“ˆ, mind 🧠, body πŸ’ͺ, and spirit🧘.

We will give our CFO's take on a topic to grow your business profitably each month.

In addition, we will provide you with two to three things we are listening to πŸ‘‚, readingπŸ“š, or watching πŸ‘€ that we believe will help grow an entrepreneur.

CFO’s Take - How to Price Your Service

How do you set a price for your service? We get this question a lot at Changing your price is one of the most impactful things you can do for your business.

A study by McKinsey & Company shows that a 1% increase in price leads to an 11% increase in net income.

The first thing to remember is that pricing is part science and part art. Setting a price entails understanding and calculating your costs, which is science.

It also involves knowing and communicating your value, which is art. This post will dive into calculating costs and ways to determine your value so you can correctly price your services.

Calculating Direct Costs

The science part behind calculating your costs is allocating direct costs and adding a margin. Direct costs are directly related to the production of your service, such as materials, supplies, labor, and software.

To calculate your direct costs, you first need to list each direct expense associated with your service. Then, determine a desired profit margin. This calculation should look like the following:

  • 200 hours of labor at $100 per hour = $20,000

  • Material = $20,00

  • Subcontractors = $25,000

  • Total costs = $65,000

  • 50% profit margin = $65,000

  • Total price = $130,000

Although this approach is not wrong, it leaves money on the table. In addition, only using direct costs neglects overhead, which impacts profitability. Your pricing structure must reflect all the costs your services consume.

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Brain 🧠 Food

πŸ“ˆπŸ“š Increasing your price is the most effective way to grow your company profitably and have more profit with fewer customers. Easy said than done, right? Read how Disney accomplished more profit with fewer visitors by clicking here.

πŸ§ πŸ‘€ Everyone loves the family and friends discount, except your business. Check out how a fellow colleague doubled his profitability by eliminating this mindset by clicking here.

Thanks for reading, Luke Templin!

P.S. There are two ways to work with Luke to grow your business profitably.

  1. Virtual CFO Cohort for service-based entrepreneurs with $250k - $1 million revenue.

  2. Fractional CFO for service-based entrepreneurs with over $1M in revenue.