Yesterday, I was talking about packaging and pricing questions. Probably the oldest questions on the web. How do I sell my thing? And what do I charge for it. I may have joked about the dot com era, but it wasn’t really that big of a joke. These questions are asked just as often now (perhaps more) as they were then. And now that I’ve said my piece on packaging, I’m going to share fail proof ways to price your thing, be it a service or a product. What? No way.
Way. I’m giving you why it works, how to do your own math and having my husband check mine.
I design brands. I’m not John Nash by any means. As an official disclaimer, I am providing links to my research on the matter. Please consult a financial professional (not me because I’m not one) for help with taxes if you need it.
A Couple Things: Taxes
First, self employment tax is different from what you pay as an employee. When you work for someone else, the taxes for Medicare and Social Security (in the States) you only pay half of the tax percentage. That’s right. Your employer pays half of your requirement percentage for you. So if you have ever felt like you were shafted as an employee, wait til you work for yourself. Total, Uncle Sam wants 15.3% of your first $118,500.
Stay with me.
I live in Illinois, so I’ll be using my state as an example, but you will need to look up your state’s tax laws or find out from a tax professional what you need to do.
Now, my state has a flat income tax rate. It -gasp- went down in 2015 from 5% to 3.75%. That means that no matter how much money I make, Springfield wants their 3.75%.
So altogether, that means that 19.05% of everything that I make needs to be paid out in taxes. This means that in order to know how much I need to make for take home is going to be whatever I want/need and 19.05% of whatever my grand total is.
So the big take away here:
- Federal taxes: 15.3%
- Illinois taxes: 3.75%
- Total taxes: 19.05%
Pricing For Services + Products
Why This Works: This method works because you are working backwards to achieve your end number. Talk about packaging coming in handy. ; ) But in all seriousness, working from what you want and/or need to make is the surefire way to make sure that you’re making what you need and want to be making. Want to buy a house in a year? Factor that into your pricing. Need to pay your student loan debt? Factor that into your pricing. Everything that you need to be making, your household budget, your extras, your business expenses, your long term goals. It all needs to be in your pricing.
How To Do It: Let’s use a pretty straight forward example. You need to be making $35,000 annually to keep yourself and your business afloat. So let’s break it down into what you really need to be making to not just float, but sail, including paying the tax man.
You need $35,000. Now if you’re following the age old accounting rule of saving 20% (or 10% to save, 10% to tithe) then you are going to have to actually make $42,000 take home. So now we have a number that you are going to need to strive for take home.
Hubs saved the day and we talked through the following formula. I suck at math so I’m going to break this down nice and neat.
You are going to need the following parts:
Tax Percentage: 19.05%
Take Home: $42,000
Gross: X (the number we are looking for. This is all the money you make.)
Take Home Percentage: Y (Super easy to find)
Next you need to do some more simple math.
- Divide what you need to make by 12.
- Divide this by how many clients/products can be served.
- This number, whatever it may be, is your price.
The Differences Between Products + Services
The formula may be the same, but let's talk about overhead. Typically speaking, product based businesses have a substantially higher overhead than service based businesses. This is for a few very good reasons.
First, you have to have the physical product. You have to ship this product. You have to store your inventory. People in product based businesses know what I’m talking about here.
Second, you have higher liability. For example, if I design a logo, really the worst thing that could happen is that my client doesn’t like it or someone somewhere has designed something similar. While this is terrible (I don’t want to make light of either scenario), the customer does not have in their hands for example a broken mug. After someone else recklessly threw your package around, the company then ships you another one, eating the shipping and the cost of another mug. And if they have a brick and mortar shop, they have the potential of slippage (or stealing.)
Third, costly mistakes. If I spell someone’s name wrong on their logo, that is easily fixed with a few moments of my time. If I spell March wrong in a planner, that could cost me thousands of dollars.
Service based businesses do not need to take these things into account. Overhead is a serious cost that needs to be considered while totalling up how much you need to make.
I know that this seems really difficult (I almost quit writing this post before hubs helped with math), but this takes the guess work out of pricing. And knowing your numbers is the number one way to know how hard you have to work your tail off to make shit happen. So run your numbers and get good with them. Best of luck!