Running a Small Business

Lesson 1: Setting Prices

What are you worth?

Your main activity should not be working in your business. If that seems strange, it's because many small business owners do exactly that and only that and their business then never grows, develops or evolves. They are running around doing things themselves or closely managing their staff when they should be deciding what the next step in their business will look like and making it happen. They should be working ON their business.

Even if you are in a business providing services, you shouldn't be running your business once you've set it up. If you enjoy working at providing the service you're offering, then it's fine to continue to take and carry out some orders but your main activity should be that of the leader who makes the company grow and the visionary who is going to set the course for the business over the next few years.

To see how that works, you have to pay yourself accordingly. For doing the clerical administrative work you pay yourself the going rate for that kind of work. For providing a service to your customers you pay yourself the normal rate for that work, normally a higher rate than for clerical work. But the highest rate would be the rate for the owner and president of the company. When you work at that job, guiding the company, developing strategy and working on your business, that's the most important work you can do. It's important for the company and it's important because the other work can be done by others but only you can do this job.

Chapter 9 of our recommended resource, "The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do about It", has more on the concept of working on and not in your small business if you want to read another viewpoint on this aspect of running your small business.

Now you can re-visit your overhead and production cost calculations. If you're just starting out, you'll probably still be doing some admin and clerical work - make sure that work is calculated and in overhead. Then you'll be working on orders - put that in with a standard rate per hour and put it in production costs. Now put in how much work you'll be doing as president, assign an hourly rate and put that in overhead. As your business matures, you should be doing more and more of the latter and you will then be paying yourself more and more, just as you deserve for being successful.

After this step, you can calculate your pricing based on cost. You have your production costs and your overhead. What's missing is a projected order volume. For now, just put in something reasonable, calculate the corresponding production cost, add the overhead and you have your total cost for that number of orders. This is the starting point for your price.

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