The Profitability Sweet Spot: a simple pricing formula to use with your next proposal or programme

by Karen Skidmore | 07,21 | Pillar Articles, True Profit

The problem with selling services, such as coaching, advice and consulting time, is that it’s very easy to get caught up with how much you ought to be charging. Emotional stories such as “I’m not that worth that much” or “There’s no way my clients will pay that” whip you up into a storm at times, and you can spend days, if not weeks, agonising over the price of your next proposal or new programme.

When you’re selling your time and expertise, you have a low cost of sales, which means you don’t have to spend that much each month to be able to do what it is you that you do. So your prices are often based on how much you feel you can charge.

Although I am a big fan of trusting your intuition in business, emotional feelings are not good commercial indicators, especially if you are working hard to find enough clients each month and you may be coming from a place of worry or anxiety over where your next piece of business is coming from.

What if you could have a simple pricing formula to ensure the prices you charge, give you the income that you want at the end of each month?

There are a number of ways of calculating prices.

Cost based pricing; good for physical products, but not so good for services because of the very low costs involved, particularly if you work virtually and don’t have any office or clinic space.

Value based pricing; typically used for services, but because of the emotional stories, very few service professionals allow them to charge enough and so end up using the next method.

Market based pricing; set your prices based on what everyone else in your market place is doing. The problem with this method is that the only way to ‘win’ at this one is to be the cheapest. Customers will typically use price as the deciding factor when choosing you and you get trapped into having to work harder by having to work with more clients. It’s like putting your next proposal or new programme on Amazon marketplace and just hoping you come out on top of the searches.

There’s a fourth method and that is income based pricing; charge the price that gives you the income you want. And this is what I wanted to demonstrate in this article.

Before I dive in, I have a few caveats.

1) I’m over-simplifying the figures in this article to make it easy for me to share examples. Do you own finance work and costings to make sure it stacks up for your own business.

2) The kinds of businesses that this can work for are usually service providers, such as consultants, coaches, accountants and therapists, because operating costs are usually very low for these kinds of businesses, particularly if you are working virtually and have no office or clinic space.

3) What I am sharing here is not professional accountancy or finance advice. I am not a qualified finance advisor so do seek proper tax and accountancy advice from your own accountant.

4) In my working examples below, I write about monthly revenue. For most businesses, your revenue ebbs and flows. Sometimes people refer to this feast and famine, but in my experience, there is always a natural cycle of a few months of harvest and a month here and there of letting your fields go fallow. So don’t get hung up on the fact that a monthly income needs to be consistent to be successful, because consistent income is one of those holy grails that marketers sell you, but isn’t always easily achievable! It’s how you manage your manage your money during the harvest months that allow you enjoy the fallow months that matters.

How you may be using your income reports right now

For most people, you hire an accountant or bookkeeper to keep track of your finances, and at the end of each year, your accountant hands you your end of year accounts. This is when you find out exactly how profitable you were over the last year, how much tax you now need to pay and how much you’ve actually earned.

There are two problems to this approach. One, you may end up being very disappointed by the final figures, wondering where all your money went after working hard all year. If you’ve not been on top of your finances during the year, this is also where you may find that you’ve not put aside enough tax. This happened to me in my early years; it’s not a nice feeling!

Two, your tax returns and company accounts aren’t really designed for your business use. Tax returns and statutory accounts are legal requirements to let the Inland Revenue know how much tax you have to pay. As day-to-day tools to help you manage your business, they are pretty useless. Some business owners will have accountants who help them with management accounts each month, but for most, they are still too clunky to be use them to help decide on what their pricing ought to be.

You need a simple pricing formula that you can use to quickly and easily price up proposals and programmes.

The Profitability Sweet Spot

If you are like most service based business owners, there’s every chance that you allow yourself to think that whatever you charge your clients, is what you get as income, minus a few expenses and a little bit of tax.

Thus if you charge a client £1000, you may think in your head that your income is about £900, give or take. If you have been trading for several years, this may be why you feel deflated at the end of each year when your accountant hands you your tax returns, and you realise you ended up making very little money. This can often trigger those thoughts that you aren’t working hard enough and thus you keep on the crazy ‘work harder’ hamster wheel.

Here’s how I look at a business’ finances, and how I use them to help them with my pricing.

There are four main areas that your revenue needs to go towards, apart from your personal income; tax, running costs, business growth and personal development.

Let’s go through each one.

• 20% Tax. You only pay tax on your profits, rather than revenue, and there are different tax rates depending on your overall income, including personal tax and corporation tax, if you are a limited company. This is why I make the caveat above about over-simplifying. I am not a tax accountant and nor do I want to be working out my own tax each year. But I do want to include a percentage of tax in my pricing to ensure I am being paid the money I want in my personal bank account. 20% is often slightly higher than it needs to be, but I always work to have more money in my tax account rather than risk having a short fall and not being able to pay my tax on time. Anything extra left in my tax account after I’ve paid my taxes I see as a great way of saving, so it’s a win win in my opinion.
• 10% running costs. Of course, this is going to vary depending on your business, which is why you have to get clear on exactly what you spend each month. But over the years of working with many consultants and service businesses, this figure is a good average to work from to get started. This percentage needs to cover everything from internet services and website hosting, to admin support and insurance.
• 5% business growth. Your business needs income, too. You may need ad hoc technical support, or need to invest in a new website, images or brochure design. Having this percentage ensures you have the cash to build up a buffer to pay for what you need, when you need it. Too often small businesses like yours struggle to invest, particularly as they start to scale up and grow, because they are trying to pay for things like new websites or branding out of cash that month, and that’s never easy to do.
• 5% personal development. Investing in yourself is critical as a business owner. Yes, this may cover the obvious such as coaching or mentoring, but you may also want to invest in CPD training or keep yourself up to date with the latest industry trends or attend a conference. Again, like business growth, people often try to pay for these things out of cash that month and if you struggle to have enough money, you forgo what is needed to develop yourself, both personally and professionally.

So the profitability sweet spot becomes 60%, which means for every £600 you want to earn, you need to sell £1000 to get that income.

Or let’s put it another way, for every £1,000 you sell, your true income is just £600. How does this make you think about your prices?

Now that you know you need 40% of everything you sell to go towards tax, running costs, business growth and personal development, can see why you have to charge better than most of your competitors.

Let me give you some working examples.

Example #1 Freelancer wants an income of £2,000 a month so needs to sell £40,000 of services a year

20% Tax: £8,000
10% Running Costs: £4,000
5% Business Growth: £2,000
5% Personal Development: £2,000
60% Personal Income (Profitability): £24,000

To sell £40,000 of services in the year, your monthly revenue needs to be £3,300. And if you work with five clients during the month, they each need to be spending £660 with you each month.  Thus, £40,000 divided by 12 months = £3,300 divided by 5 clients = £660

Example #2 Consultant wants an income of £6,000 a month so needs to sell £120,000 of services a year

20% Tax: £24,000
10% Running Costs: £12,000
5% Business Growth: £6,000
5% Personal Development: £6,000
60% Personal Income (Profitability): £72,000

To sell £120,000 of services in the year, your monthly revenue needs to be £10,000. How this breaks down per client will depend on your business model but if you are predominately working with as a consultant, then this may look like five clients a month need to spend £2,000 a month with you.

If you sell group programmes, then maybe you need to be selling ten places at £1,000 a month. Or if you sell longer term contracts, such as training or consulting, then that may be ten clients over the year that all need to spend a minimum of £12,000 each.

What will typically happen with a business this size is that you will have a few different revenue streams, and your revenue will often ebb and flow over the year, as highlighted above in my caveats. But it never needs to be complicated.

If you struggle working this through with a business this size, then reach out to me. I do this work with my clients all the time so it’s easy for me to show you what your revenue model could look like with the right prices in place.

What if you are running at a higher profitability than 60%

What if you are genuinely paying yourself far more than 60% of your revenue each year? If it’s working for you, then great. You don’t have to be putting aside 5% for business growth and 5% for personal development, for example. And you may find your running costs are less than 5% over the year.

But there are two profitability danger spots you need to look out for.

Swinging into 80% or more

If you are swinging towards 80% profitability and above, and earning £800 for every £1,000 you sell, then there is a danger of your business being under-invested and under-resourced.

In the short-term, this may work. Enjoy the fruits of your labour!

But long-term, you may find yourself burning out, particularly if you are in the higher revenue bracket as seen in example #2. If you run a business with a revenue of £100,000 and more, then there is every chance you need a good operations person, and perhaps even start looking at hiring associates if you are in high growth phase, so it may mean you aren’t spending enough to give you the team, processes and systems to support you in your work.

You are working hard at doing everything yourself, and although this can work in the short term, over many months and years, your health and wellbeing is going to suffer trying to keep up with delivery work, as well as what it takes to sell and support you and your clients.

Swinging into 40% or less

If you are swinging towards the 40% profitability and lower, and earning less than £400 for every £1,000 you sell, then there is a danger of your business being over-invested and under-resourced.

In the short-term, this may be necessary; you may be going through an intense period of growth and hiring new members of your team whilst the revenues go up. Hang in there if this is the case, and stay strong with your vision.

But long-term, you may find yourself over-spending and if there is one guaranteed way of a business going under is a lack of cash.

One area I often see being over-spent is personal development; high priced coaching programmes and getting sucked into big marketing programmes can often put a business owner into a cash flow crisis, especially if you are using a credit card to finance.

The other area is hiring too many people, especially if you have decided to run a big launch or you are developing the digital marketing side of your business. You want to have a tight rein on your finances and ensure that whoever you are hiring have clear ROI targets and know what is expected of them.

So watch out for these two swings in both directions. Over the many years of working with consultants, agencies and service professionals, the sweet spot for your personal income happens around 60%, whilst ensuring 40% of whatever you sell goes into your tax, running costs, business growth and personal development pots.

How does this help with your pricing decisions? Let me know what you put into place and what impact this has on your business.

Until next time, do less, be more, play bigger.

Why health is the number one investment in your business

by Karen Skidmore | 03,21 | Pillar Articles, True Profit

Fatigue, stress and hormone imbalances have become serious problems for many business owners, particularly those of us in our 40’s, 50’s and beyond. And it’s caused many to pull back and play small to protect themselves. When we feel exhausted, we can talk ourselves out of plans we feel we don’t have the capacity, confidence or courage to take action on. But this fatigue and fear of not having enough energy is costing us dearly, and over the years I have come to see that our health is the number one investment we need to make in our businesses.

I’ve experienced fatigue over the years and I know only too well how frustrating and costly this exhaustion can be.

I’ve been frustrated and, at times, incredibly angry about how crap I’ve felt as I’ve gone through my midlife changes and there have been long periods of my business when I’ve pulled back and not done the things I wanted to do. When have the right conditions to fuel our vitality, growing profitable, sustainable and scalable businesses is much easier. But in order to do this, we have to understand and know how to work with, rather than against, our own cycles and flow, as well as the cycles and flow of our business, the economy and the planet we live on.

My fatigue began in my late 30’s. I was in full Superwoman mode; mother to two young children and running a successful term-time online coaching business. Then my Dad got sick. After 18 months of going through three rounds of seriously intensive chemo, he died of Lymphoma in the summer of 2010. My parents lived in Devon at the time. Me in Surrey. So I spent the best part of two years driving up and down the A303, sometimes back and forth in one day. It was no surprise that my shoulders seem stuck to my ears from all the driving, and I had consistent chronic neck pain.

My life seemed to take on a black comedy as, if that wasn’t enough to deal with, I had been convinced to take on a 9 month rescue dog because the family wanted a pet. The autumn of that same year of my Dad dying, he got run over by a truck. £6,500 worth of vet bills and reconstructive leg surgery later I was left looking after a lame dog, whilst dealing with our family grief. I tried counselling but one session was enough for me to decide I didn’t have time to let all this grief out so I zipped it all in. And in January 2011, I went headlong back into making my business work again.

I re-designed my business to get away from the constant launching of digital programmes and closed down a membership site product. I knew I didn’t have the capacity or the inclination to spend my time learning and keeping up with the latest digital tactics that I was teaching. And I missed direct contact with clients, being involved with their decision making and simplifying their marketing systems.

My business moved into a one-to-many model and I launched my first group coaching programme in June 2011, The GID Marketing School, which is still offered today as a foundation course for our Momentum business growth programme.

All the changes I was making to my business was working on paper. I was certainly doing less, having more fun and making more money than before. The problem was that I was still in Superwoman; that same driving force I had back in my 30’s was being used in my 40’s. And let’s not forget the trauma of losing my Dad I had buried deep inside of me.

In the summer of 2012 I hit the proverbial wall. I simply couldn’t get out of bed one weekend. I realised that this tiredness I was feeling wasn’t going to be fixed by a few early nights. I would like to be able to give you a happy ending, but unfortunately, my exhaustion confused and depressed me. My GP told me I was fine and that all women my age go through this kind of symptoms and as my blood tests all came back normal she simply suggested I take some iron tablets.

I conveniently blamed my physical state on peri-menopause which gave me permission to believe that all women went through this so just get through it and by the time I’m 52, all will be well. Ha! My saving grace finally came from finding a community called One of Many in 2017 and it was through some deep personal development work that I began to feel alive again and take back control off my physical and mental health issues.

What I’ve come to deeply understand through my fatigue journey is that you can look to others for inspiration on what makes a business work, have the best product funnel set up and following the latest surefire, tried-and-tested marketing system … but if you don’t find the ways to create the right conditions to fuel your vitality whilst you go about growing your business, you’re in danger of boom-and-bust and crashing your body.

That’s entrepreneurial burnout. And it’s rife right now. But it’s not doom and gloom.

The reason I wanted to share my story is to inspire you that there is life, vitality and the full force of creativity on the other side. That once you make the decision to invest in your health and wellbeing for the sake of your business, you will experience it for yourself why it needs to be the number one investment to make before you look at any growth opportunities.

Once my fatigue was under control, my business began to blossom once again and through my teachings around True Profit Business and the work we do with our Momentum members, I feel I am doing my best work yet. Yes, I have invested in systems, processes and my team but it wasn’t until I began to take my health seriously that I experienced the shift in my own business growth.

I still have to manage my health and wellbeing and yes, I do have set backs as I get tempted with bread and cakes, and eating too much sugar. But I stay alert and tuned in to my body because I know, if I want to do the work that I want to do, I have to make sure I have the right rhythms and rituals in place to support my health.

It’s why we now have Health & Wellbeing as one of the five steps in our Grow Strong™ planning process in Momentum; it’s the foundation that each 90 day plan is built up from so that each of our members are clear on what rituals and rhythms they need to support their growth.

So along with their sales targets for the next cycle, they have to submit what they are doing to move, as well as nourish their mind, body and spirits.

What to do if you feel you need prioritise health as your next business investment

Perhaps you’ve hit the wall like me back in 2012 and you’re staring at this screen frustrated that your brain fog is so thick you can’t think straight. Perhaps you’ve not hit that wall yet, but you recognise the tiredness is affecting how you think about your business and you’re perhaps pulling yourself back on plans you previously had. Wherever you are at with your current health, if you feel you need prioritise your health, here are some of the things I did to start taking some control back of my energy levels.

1. Recognise you have a health problem

The sooner you stop kidding yourself that everyone else is tired and this is just the way of the world, the sooner you can start helping yourself recover. Start with your GP. And yes, I know from experience, that many GPs are just not equipped to understand and investigate fatigue illnesses or hormonal changes so it can take months, if not years to get the medical help that you need. And you may have to go private if you can afford to pay the fees. I’ve found that hormone testing is best done privately because you’ll simply get better results. If you’re interested in speaking to someone, then I can recommend Nicki Williams from www.happyhormonesforlife.com

But don’t get ahead of yourself and make this a bigger problem than it needs to be. One visit to the GP and a blood test later and you may find you have a real simple medical treatment to follow. The reality is that there’s every chance you’ll have to be making some serious lifestyle changes – what you eat, drink and how you exercise and move – but start somewhere and your GP will hopefully be the place for that.

2. Ask for help and explore your options

I know from experience that fatigue causes confusion, brain fog and decreases your ability to make decisions so you need to ask for help. I battled with this for years. I thought I could fix it all by myself with Google searches and a few books on menopause. But it wasn’t until I started getting recommendations for health practitioners such as kinesiologists and acupuncturists that I started to realise that my fatigue had a shed load of trauma and grief blocked behind it. It wasn’t pretty, that’s for sure, but shifting this blocked energy helped me tremendously to get my physical health back on track.

Explore your options, speak to friends or family members, try out treatments recommended to you and you may surprise yourself with what works for you.

3. Is your business model right?

As the pace of our living gets faster and social media feeds us a stylised version of what business success looks like, we seem to be obsessed by how to get more done in less time. And when we’re not sure exactly what needs to be done, rather than look to our vision and business strategy for answers, we buy into the next “should-be” marketing tactic, funnel or success formula that promises us results but simply distracts us by never-ending to-do lists.

It’s easy to see how a lot of people get trapped by building the wrong business model and end up selling and delivering the wrong products and programmes that only drain them of their energy. It’s why one person’s success formula won’t necessarily work for another.

The more time we spend understanding ourselves and how we work, the easier it becomes to build a business that fuels us. Personality profiling tools such as Talent Dynamics are a really quick and easy way of starting this process and other tools such as Motivational Maps can help us understand what makes us tick. Think of it like packing for a holiday; if you were going on a beach holiday, you wouldn’t be taking your ski jackets with you. It’s the same for your business. If being in front of screens all day drains you, is a digital business really right for you … even though you’ve been told by many experts that passive income is the way to go?

Build a business model that’s right for your being, your values, how your energy flows and the money you need to make the choices of how you spend your time.

4. Know that energy flows and needs replenishing

I have learnt that we have many energy states that we have access to help us thrive and rise to our full potential. Energy isn’t static; you can’t keep it topped up and have it stay there. Nor is to be treated like a credit card; think you can go full pelt for a few weeks and then catch up with sleep at the weekends.

Energy flows in cycles and to help my clients experience how to work with this flow, I teach three different energies to use when they are growing a business: Lean In, Lean Back, Ground.

Giving energy flow form can help you keep going forward with your business growth plans, but without the drive and push energy that can burn us out. When you know which energy to use for different tasks such as visioning, planning and implementing, you’re able to make better decisions and find a simpler flow to working during your week.

If feeling energy flow is new to you, then I recommend you first start tracking your energy cycles and flow that happen throughout the day, week and month. It can be hard to do if you are particularly fatigued so it may be that you need to action steps 1 and 2 first before you try this. But what you will find is that some tasks you do in your business light you up and some suck you down. At some points of the day you feel alive and at other times you may just want to crawl back under your duvet. For women, your monthly cycles have a direct impact on our energy so if you haven’t done so already, starting tracking these immediately.

I’m no bean eating, juicing goddess!

If you know me, you’ll know I’m certainly not some bean-eating, juicing goddess who gets up every morning and starts her day with yoga and meditation. I’ve tried but it’s simply not me. If that is your thing, great …. but you may be pleased to know you don’t need to be all zen in order to create zen in your life.

What I do know is that without creating the space in your week to work on your vitality, the vision we have for our business just doesn’t happen. And this is what I want to help you stop from happening. Because when you are exhausted, you pull yourself back; you will talk yourself out of plans you feel you don’t have the capacity, confidence or courage to take action on.

If you want to discuss this with me and what you can do to redirect yourself and your business, get in touch or book in for a 30 minute zoom call. I’d love to help if I can.

Until next time, do less, be more, play bigger.