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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:
- What is the going rate in the graphic arts
industry?
- What kind of income do you need to live
on?
- 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.
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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