What to charge as you begin new business Setting fees: Lump sum or by the hour, some tips about pricing your work to keep customers coming back.

WORKING LIFE

January 14, 1996|By Deborah L. Jacobs | Deborah L. Jacobs,CHRONICLE FEATURES

Today's uncertain business world has made entrepreneurs of us all. People who are played out in corporate life are becoming self-employed. Others, still on the company payroll, are moonlighting to build a safety net.

Whether you're starting a business in your garage or thinking of free-lancing on the side, your first client will probably be someone you know. You may be flattered when a neighbor or business contact asks you whether you can take on a project. Then comes the awkward question: "What would you charge?"

While eager to bring in work, you don't want to sell yourself short. Yet you know that bidding too high could drive away business.

In arriving at a price, how long the project will take is one factor to consider. If you can roughly estimate the time you'll need to spend, charge a lump sum.

Lump-sum fees are potentially more lucrative, especially if you've done that kind of work before and don't need to reinvent the wheel. Also, clients don't know exactly how long a project takes you. Therefore, they may be willing to pay more, in effect, than if you charged by the hour.

Lump sums are risky if you don't know -- or have no control over -- how much time you must put in. Here, the risk is that the client may demand more work (like endless changes). What sounded like good money when you bid on the job can quickly turn into awful wages.

When you're unsure about the scope of the work, you're better off charging by the hour. To figure your hourly rate, take your most recent salary and divide it by 2,000 hours a year (that's 40 hours per week for 50 weeks). If you're working without benefits, or are paying your own, increase that sum by 30 percent.

Take the case of a former information manager who wants to work as a computer consultant. This person's previous salary, which was $50,000 a year, works out to $25 an hour ($50,000 divided by 2,000 hours). By adding $7.50 (30 percent of $25) for benefits, the consultant comes up with an hourly rate of $32.50.

What's the going rate? Once you've done the math, you may need to adjust your hourly fee downward or upward to stay competitive with what others charge for the same services. For example, given the current demand for people who understand computers, our consultant might be able to command slightly more (between $35 and $50) than the hourly rate we calculated.

On the other hand, a secretary who earns $35,000 a year at a staff job would use the formula to come up with a free-lance hourly rate of $22.75. But few clients would pay that much for typing, since the going rate is more like $12 to $15 an hour. To make up the difference, the secretary could work more hours or do something more lucrative.

Find out the going rate by contacting the chamber of commerce or asking friends what they've charged (or paid) for similar work. Another option is to pretend you're shopping for services. Go through listings in the phone book, call around, and compare prices.

Are there other advantages of the project? Your first goal is to gain experience and develop satisfied customers who will give you more assignments and refer you to other clients. That could mean bidding 10 percent below the going rate initially to drum up business.

Once you've put your price on the table, be open to negotiation. If a client objects to the fee and you really want the job, indicate that you're open to compromise. "I don't want price to be an obstacle," you could say. "What's your budget?"

Remember, you're building a relationship. Do good work that keeps clients happy, and, chances are, they'll send more business your way. At that point, you'll have plenty of time to raise your rates.

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