How to price your design packages for profitability
Pricing your services is one of the toughest things you need to do. Because your pricing is not just a number, there are often a lot of emotions connected to your pricing.
Maybe it's connected to how you feel about yourself or how confident you are in your design skills or the feeling that because you're not in business as long as competitor x you can not ask for the same prices.
So I think it's good to take the emotion out of your pricing and base it on numbers.
That's why in this blog we're looking at:
How to evaluate how much profit you are making now so that you know if you need to change something.
How to calculate your hourly rate and why you need to know this even when you're offering packages.
And how much to charge for branding and website design so that you’re making a profit.
Step 1: How much profit are you making now
Before I get into looking at how to determine the pricing for your services let's first evaluate your current profitability so that you know if you need to change something.
For each client project, you need to add up the hours you worked on it and multiply it with your hourly rate (even if you use package pricing, you need to know your hourly rate, if you're not sure have a look at step 2 to 4). Then take that number and deduct this from the price your client has paid you.
Let's look at an example.
Your website design package is £2000, which will be paid in 3 instalments of 20/40/40.
You have received the first 2 payments which equals £1200.
Your hourly rate is £25
So far you have spent 50 hours on the project
50 hours x £25=£1250 while you've received £1200
At this stage, you're not making a profit but you still have the last payment of £800 coming in next week. To still make a profit of £100 while considering you were making a loss of £50 so far:
Next payment £800 - £50 - £650 in hours = £100 profit
£650/£25 per hour = leaves you with 26 hours
If you can finish the project in 26 hours, you still have £100 profit left.
This is not a large profit margin but the main takeaway is that you have a target as in how much time to spend to still finish the project with a profit and a clear understanding that with your current pricing and the time spend on projects you don't have much wiggle room to still turn a profit. So reviewing your rates should definitely be a priority.
See in below video on how you can make a revenue overview in Clickup
Step 2: Decide how many hours you want to work each week
This is a short step, but one that is really important as it will lay the base for what your pricing should be. To get the input you need for this step you will need to know what your ideal week looks like. When you have defined your ideal week you will know exactly how many hours per week you want to work. If you have not done this yet, make sure to check out the blog I wrote about how defining your ideal week can help you reach your goals.
The next thing is to decide how many weeks per year you want to work. Do you want to take August off to spend time with your family over the summer? Or is do you want to go on holiday 2x a year for 2 weeks. It doesn't matter what this looks like, but we need to have a number of weeks that you want to work in a year.
Let's look at an example.
The first calculation will be to multiply the number of hours you work per week with the number of weeks you want to work.
So let's say you want to work 32 hours a week and work 48 weeks. This means you have 1536 hours each year to earn money.
But the thing is, not everything that you do in your business will make you money. They might in the end, but content creation, sales calls, email marketing, admin etc don't directly earn you any money.
So when looking at the pricing of your services you need to make sure you're actually getting paid for those hours that you work on getting new clients or the admin from past clients. So we'll look at this in step 2.
Step 3: Evaluate how you are spending your time
So now you know you need to get paid for those hours that you work on getting new clients and not just the hours you work on client projects. So the first thing you need to do here is to understand how you are spending your time.
I would advise you to always track your time, not just to know where your time is going to initially set your pricing but also to understand if you have a profit left at the end of a client project.
It's one thing to come up with the price of your services but if you don't know how much time you're spending on each project you might work more hours on it than you're getting paid for. So make sure pricing is not just a one-time thing, but something you keep reviewing and adjust when needed as well as looking at how you can streamline your branding design process and website design process to eliminate manual tasks or reduce the time spend on them.
If you have not been tracking time just start with 1 week. You can write everything down on paper, record it in a spreadsheet or use the time tracking that's within (or one that can be connected to) your project management system. For your client work, track your time per client project.
When you have done this there are a couple of things to do:
You need to add up your time for tasks you have done several times
You need to add up all the time you spend on client projects (without losing track of the time spend on the individual projects)
Make a list of all the tasks and cluster them into 2 sections. What tasks are related to client work, which is related to working on your business?
Then cluster the tasks for working on your business. What are marketing tasks, what are content creation tasks, time spend on discovery calls, admin etc?
Now it's time to add this all up. In the end, you want to know how many hours per week your spending on client work and how many hours on the back-end of your business.
With this information, you can make the second calculation. Multiply the number of hours you work per week on client work by the number of weeks you want to work.
Let's look at an example.
So let's say of those 32 hours you want to work each week you spend 28 hours on client work.
As mentioned above, you want to work 48 weeks.
This means you have 1344 hours each year to earn the money you need to earn.
The next step is to know what this number actually is.
Step 4: Decide how much you need to earn each year
So you know how many hours you have each year to earn your money, now you need to know what this number is. I hope that while you're just getting started with the steps of deciding your prices, you can see how personal this is. It's more than the statement you see often; charging what you are worth. That only leads to attaching more emotions to your pricing while your pricing should be based on your personal situation.
And of course, you do need to look at competitors, because if you're still much cheaper than them, potential clients look at it warily while being much higher can move them towards your competitors unless you have a very clear value proposition and why you are different from these competitors. (Not sure how to do this check out this blog)
And, through market research, you need to make sure that what you are offering is what you're target audience is looking for otherwise it does not matter what your price is. (Not sure how to do this check out this blog)
But the base needs to be solid, and that base is dependent on your personal situation.
So here you need to add up all the costs that you need to cover with how much you make. Whether this is just the costs for running your business or to pay the mortgage/rent, water, electricity etc you need to add everything up and multiply it by 12 months to know what your yearly number is.
Here it becomes a little bit tricky as you will need to consider the federal and state tax if you're in the US or the income tax percentage of your country. As you will need to add this to the amount you need to make.
Let's look at an example.
Let's say you want to take home £30.000 per year.
Then, with 30% income tax, you will need to make £42.860 to take home £30.000 per year.
Now it's time for the next calculation.
You now know you need to make £42.860 in 1344 hours.
So if you divide £42.860 through 1344 you will need to charge an hourly rate of £32.
I’m not saying you need to charge by the hour for branding and website design packages, but I'll come back to this.
Step 5: Make sure you're making a profit.
You just calculated how much you should charge per hour for your branding and website design packages. But you only took 1344 hours into consideration, so you're only getting paid for the hours you're working, you're not making a profit yet.
So you now need to add in a profit margin.
Let's look at an example.
Let's say your website design package takes you 40 hours on average to complete.
To cover the hours spend on this project you can multiply 40 times £32. This means you should at least charge £1280.
Now let's add in a profit margin of 30% -> £1280x1.3= £1664
So instead of charging £1280, you will charge £1664.
And your hourly rate now becomes £42 (1664/40 hours) instead of £32.
Now you know this hourly rate you can review all your packages and the time you spend to complete them and calculate what your pricing should be if you're charging £42 per hour. Don't forget to check how this new pricing is in relation to your competitors.
But this is not all. You now know what your prices are, but how many packages do you need to sell each year to make sure you reach that number you decided on in step 4?
Step 6: Know how many packages you need to sell.
When you know what you're working towards, it will be much easier to understand what you actually have to sell. To determine your focus, because not all your branding and website design packages are created equal, you can make a list of your services and note how many times you sold each of your services so far.
Then calculate what their contribution was to your overall revenue. Because in general, you will see that you’re not selling each service the same amount of times.
Let’s use the same example again and say you want to make £42.860 this year in revenue.
You offer 3 different packages:
Brand Audit Package which you sell for £1.000,
Brand Design Package which you price at £2.000
Website Design Package with a pricing of £5.000.
You sell your Brand Design Package the most, and this is generally 1 per month. Now you can calculate how many times you need to sell each service to get to £42.860.
Now you know that you need to sell:
Brand Audit Package -> 4x = £20.000
Brand Design Package -> 10x = £20.000
Website Design Package -> 3x = £3.000
If it’s April and you have sold your Brand Design Package, already 4 times, you are right on track with this contribution of this service towards your end goal. If you sold it 6 times but it is August you know you need to focus your marketing on this package as you will need to sell 1 per month.
So let’s put a bit of strategy behind how you can reach this goal by breaking it up into quarters.
Don’t just divide everything by four and say that if you would need to sell package 1 4x in a year that you will do one each quarter. Look at the months on their own. Will December and the holidays have an impact on your business? Do you see less demand in months like July and August when there are school holidays?
Think a bit out of the box with this as well. Are they any big names in your industry that have a big yearly launch like Marie Forleo’s Bschool in February or Ashlyn Carters Copywriting for Creatives that could impact spending habits?
Then map out your holidays or any other periods that you are limited in time. Now you can spread these services out over the months that you have left. This will give you a better idea of when you need to sell what (considering lead time) so that you can direct the focus of your marketing efforts and how you spend your time (yep, this is where your ideal week comes in again and using theme days and time blocking)
AND THERE YOU HAVE IT
There you have it, a 6-step plan to price your services based on data, not on feelings. So that you can transform your business to be more sustainable and profitable.
Don't think you'll be able to get here on your own? Don’t hesitate to reach out! You can fill out the contact form, send me an email or have a look at this page to see how I could help you to transform your business to be more aligned, less draining and more profitable & sustainable.
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