“How much do you charge?”
Are these the five most anxiety-inducing words in the creative entrepreneur’s vocabulary? Did your stomach clench up just reading that?
What if you not only had a number in mind, but you could state your price without having an urge to immediately offer a discount?
The number we’re talking about here is called your cost of doing business, or CODB, which means, essentially, your minimum price. (Note that I said minimum, meaning, you can and should charge more than this if your skills and your market will bear it). Your cost of doing business is, essentially, the price it takes to keep the lights on and your butt in the seat (or behind the camera).
Knowing your cost of doing business allows you to end sales calls and send proposals with confidence in your value and the work you’re doing. Wouldn’t that feel refreshing? It’s also how you know what your baseline numbers are so that you don’t end up working seven days a week to pay your bills. That’s because you’ll build some profit into your prices—and profit is just a fancy way of saying “your ability to continue having a business”.
In short, knowing your cost of doing business can be the difference between being a struggling freelancer and being a BOSS.
How to find your baseline number
Don’t worry—finding this number is easier than you think. [If your eyes are glazing over already, head over to grab a handy-dandy spreadsheet that I made—it will do the math for you! Plus, it takes into account things like types of customers, existing numbers, and so on.]
First, make a list of all your regular and irregular expenses, like:
- Software and subscriptions
- Office expenses
- People you hire
- Travel and transportation costs
- Professional development
- Financial charges (like PayPal and Stripe fees, interest on business debt, etc.)
Then, convert them all into annual expenses and divide by 12. Next, add 30% (for taxes*, my friends—oh, how we love to forget about taxes!). This is your starting point. This number is your monthly “keep the lights on (and the tax-man away)” number.
But remember—your true cost of doing business is “keep the lights on and your butt in the chair”. So, now we need to talk about your salary.
You can actually do this same exercise with your personal finances—what are your personal minimum expenses? What do you need to keep your lights on at home? What about the cost of buying yourself health insurance, paying for out-of-pocket medical costs, and contributing to your retirement fund (all things that are subsidized when you’re working a “regular” job)?
Add your two “keep the lights on” numbers together, and that is your (bare-minimum) cost of doing business.
*30% is a rough estimate, and taxes can vary a lot. Ask your tax preparer for your personal rate if you’re not sure.
How to use this number
The most important thing to remember about this number is that it is your minimum. Any additional money you charge is money that you can use to invest further in your business, outsource more work, pay yourself more, or save for rainy days (or bad revenue months).
So, how do you turn your cost of doing business into a price for your services?
First, ask yourself: how many people do you want to work with each month? Not how many people can you work with each month, but how many feels good? Be realistic here, and make sure that you’re planning for things like sick days, vacation, time off for holidays, and clients that suddenly take up a lot more time than you’d planned for.
Now, let’s say your minimum cost of doing business is $5000. If you make less than that number, you will have to go into debt or draw on savings.
If you reasonably can expect to work with five clients a month, every month of the year, then that means you need to charge each one of them at least $1000. However, if you can work with five clients a month but your business is seasonal, and you only work five months a year— then you need to charge each client $2400 just to pay the bills.
However, you should try to charge at least 25% more than your baseline cost of doing business, to allow for rainy days and investing in your business. If you have specialized, in-demand skills—or you’re in a market that can bear it—charge 50%+ over your minimum number. This will be a huge help with your cash flow and your ability to continue running your business successfully! Even if you’re not (yet) able to charge that much, building profit into your prices should be your goal.