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Steve Windhaus Ask the Small Biz Adviser

Dear Small Biz Adviser
I am planning to quit my job and start a graphic-arts business in my home. I am having some trouble setting prices for my services. Because I will be working out of my home on a computer I already own, my overhead expenses will be relatively low. Is there some type of formula for setting prices in a service-oriented business?
-- Graphically Inclined

Dear Graphically:
You consider three different approaches simultaneously when developing your pricing structure:

  1. What is the going rate in the graphic arts industry?
  2. What kind of income do you need to live on?
  3. What can you afford to charge for your services?

Traditionally, pricing is structured in one of three categories -- discount, customary and prestige. Allow me to use the analogy of department stores. Wal-Mart is considered by many to be the king of discount pricing. JC Penny is a good example of customary pricing, and Saks Fifth Avenue is a prestige-priced outlet.

It does not always mean the price is an exact representation of the quality of the product. Sometimes you are paying for the decorations, the name and the cost of the store's location. On the other hand, you will not find fine, tapered silk shirts at Wal-Mart.

When starting a new service firm many entrepreneurs typically think they need to begin with discount pricing to gain the attention of potential customers. That may or may not be a good policy.

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Honestly, it depends on that industry's type of customer. For example, if you are selling a high-speed, high-volume printing service, many customers like to find the best price by volume. On the other hand, the mother and father of a bride will be more concerned with appearance and the quality of the paper and ink used for the invitations than the price when preparing for their daughter's wedding.

Now, consider your financial needs for living and running the business. Are you willing to compromise any of your personal needs and luxuries? What are the anticipated operating expenses? Remember that these expenses will pile up whether people buy your services.

Finally, there is the matter of the quality of your work and the time consumed completing that work. Are you going to be the producer of fine, intricate, high-quality products? Will much time be consumed in completing each project? Do you personally believe quality and time consumed should be a factor in the price you charge? I hope so.

I'd advise you begin with the last of these issues. Set the tone for the type of work you want to produce. That will lead you to determine the pricing structure typically found for that quality of work in your industry, be it discount, customary or prestige. Next, you need to assure yourself the level of pricing meets your expenses, including personal needs, luxuries, operating overhead and project costs.

The world of entrepreneurship requires many intangible characteristics to survive. Given the assumption you have determined there is room in your market for another graphic artist, or that you can be a major player in the existing market, you have to believe in your ability to perform, produce and make a profit at the level you have defined. Good fortunes to you.

Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.

-- Posted: Nov. 10, 1999

 

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