Posts Tagged ‘make money’

In the last post on the series regarding my freelance Passive Income project, I wanted to wrap it up with where I am now, and how it all worked out for me (so far).

I started my passive income Buy-To-Let project in the spring of 2012, and I am writing up this wrap-up entry at the end of December 2012.  So in theory, the project has been running for 8 months.

How long before I made Money?
As I said in my previous post on my buy to let project, the purchase of the rental property completed on Wednesday, 25^th July.   We spent the next week with decorators in making the place fit to live in – they decorated the walls and ceilings, we replaced all the light fittings, replaced the curtain poles, purchased new white goods (washing machine, fridge freezer, put in a dish washer).  We then selected the property management company, and on the July 30^th, the agents went in to take pictures and advertised the property.

The management agency initially advertised the property at a rate of £750 per flat per month.   We had budgeted for £700 a month, so we were initially delighted.   But a week of no interest and a bit of right move research showed there were a lot of similar properties for rental at £725 – so we instructed the agents to reduce the price to £720 a month per flat.

That was the right move – within days, viewings had increased through the roof, and by the 8^th August (2 weeks after completion), we had tenants agreed on all flats.  In fact, on the majority, we had multiple offers and we were given different options about which tenants we wanted – all tenants were offering the £720 asking price – so we were above budget.  Happy Days.   On two of the flats, prospects got into a bidding war, on on these flats, we ended up accepting a higher offer of £750 a month.   Even better!!!

How The Money Works
At the start of the project, I created a spread sheet with the budgets for the project (per flat).    But, now that money was coming in, I double checked the income, which worked as follows:

The block of flats we purchased

Each month a tenant would pay £720 (2 were paying £750).   Of this, the funds initially worked out as….. £520 went back to paying back the loan on the property – interest and principle (so the tenants were paying off our loans – nice!), £49 went to the managing agent (their fee for dealing with finding the tenants, collecting rent, dealing with any tenant problems), which left £151 profit per month per flat.

However, we decided that ever 4 months, the extra income money would be then transferred back to the loan payments.  Our lender had a clause which said when we pay off a chunk on or above £500, the interest is recalculated.   So paying the additional income not only reduced our debt amount, but also changed the monthly payments back to them.  So on month 5, the £520 loan payment reduced to £507, which means that each month our profit increased to £164 per flat.  It may not seem a massive leap – but its compounded – every 4 months the loan payments went down and the profit went up – exponentially.

And of course – this is cash in profit (from rent).  On top of this, our share of the property increases (as the loan is repaid) so that increases the net worth, and if the properties increase in value, that’s triple bubble on the passive income.

 It’s a rocky Road Ahead
Of course, is a great picture now.   My company owns more property, which hopefully will increase in value, and in the mean time, my tenants pay off my loans which means that in a few years, I will own the property outright (and so will double my originally invested money).  Once the loan is paid off, all rental income is then passive income.

BUT, despite all the efforts of the central banks, Europe, the USA is in a desperate financial state (and soon Asia will join them).  This means that interest rates could change very quickly from the current historical lows to shocking highs – who knows.    My own predictions are that in the next 6 to 12 months, interest rates will drop further (to ZERO %?!?), before starting to grow – but that is why we are keen to reduce the loan amount as quickly as possible.

However, if you are thinking about following me into the Buy-To-Let passive income route, careful consideration should be given to the turmoil which may follow in a few years time.

In Summary
when I started this project, I was looking for a passive income stream, and I found one that I am happy with.  Yes, its not as ‘freelancery’ as say writing e-books, or developing a sell-able software product or generating money through advertising, but all of these seem to be hard work for little return.   For my investments, I am already generating a reasonable amount of money.  And whilst the monthly income may not be shockingly high, it compounds up very nicely and very quickly, and will generate a big pile of catch with little no no risk or work – just what I was looking for.

It’s still early days in this project.  I am not looking for a quick win or to make millions – but it is going to generate cash over my ten year plan.  If things continue in the future as they have done in this project, I will certainly be looking to expand into more properties whenever a major non-passive (regular day job) project generates sufficient cash to allow additional investment.

So, that’s it – that’s my passive income project.

What do you think??

I have just decided to treat my wife to a quick weekend break in the spring of next year. I am taking her for a ‘city break’ to Venice, Italy. Its just a short stay – 4 days visiting this wonderful (I hope) floating city of canals, bridges and great Italian food.  The picture below is Venice from the air (I didn’t know its an island, did you?).

But, I am not here to gloat about going away next year.   No, if I am going to gloat about anything, it’s the cost of the trip. From England to Venice, 5 star hotel in the center of the city, flights and transfers is costing me just £22.

Ok – honesty time.  So it didn’t really cost me £22 – it actually cost me £590 – but… in terms of budgeting it only cost me £22, because I saved £570 though other savings.

I have talked before about cutting personal and business costs.  Well in October, I really pulled out all the stops.

For a lot of suppliers, I used the ‘I’m cancelling my account with you (now show me your best deal)’ trick with almost all my personal and business suppliers.

For instance, I struck a deal with Sky (my satellite TV provider) for a 50% discount for 12 months, which saves me £150 a year. And British Telecom (phone for home and business) gave me a 60% discount for 12 months – so that’s another £90. And so it goes on – totaling £570 of savings. Some were instant money back or savings, and some were discounts over time. So the savings were invested in a short break.

And the point is, anybody can do the same – all that is needed is advice about money.

I am not talking about specialist ‘Financial Adviser’ type of advice, its just a question of staying up to date with current advice, warnings of changes which may effect you (such as utility price rises), and taking advantage of the advice which is out there.

So if you are interested in saving/making money (both for yourself and your business), can I introduce to you, my definitive list of great money information (all the changes I made this month which saved me that money came from these sources).

There are a lot of resources out and I could list them all for you, but these are the cream of the crop:

Money Podcasts
BBC Money Box – For UK freelancers, this weekly show brings you all the latest personal finance news
BBC Money Box Live – Again for the UK, a weekly phone in show covering a different topic each week
Which Money Podcast – Another UK weekly podcast, with advice from the Which team
Radio 5 Wake up to money – Final UK podcast – a daily update on all things changing in personal and business money.
Planet Money – Three times a weekly, American based finance news
CNBC Fast Money – Daily updates on US Finance from the CNBC team

Money Blogs
MoneySavingExpert – For the UK, signing up to this weekly email feed is a must, with alerts on finance changes, utility rises, discounts and ways of saving money.  Sadly, there does not seem to be a US version of this site.
GetRichSlowly – A collection of articles about both reducing debt and growing wealth.
I will teach you to be rich – This site is run by Ramit Sethi.   It is less about saving money, and more about growing wealth.

Money Tweeters
@prairieecothrif -If you want to be inspired to live the life you have always wanted in a sustainable way, check out the connected blog.
@retirebyforty – He quit his corporate job! Now you can follow and see if he can stay out of the corporations for the next 40 years, whilst he shares money advice!
@TalkMoneyBlog – They talk about personal money issues and give free information, help and advice about the mortgage market, debt problems, credit cards and money saving tips.
@thisismoney – This is Money: news, conversation, top articles, tips, advice and opinion from the team at the UK’s best financial website.
@lovemoney_com – Lots of useful information to help you have a better relationship with your money.

If you have any other suggestions of blogs, podcasts or tweeters to follow, I would really love to hear about them.   Please, leave a comment below.

Let’s be honest, we all want to earn more money. More income means a healthy bank balance which in turn leads to more periods of relaxation or a more relaxed attitude to future work.

However, if you are a one-man band type of freelancer or contractor, generating extra income is always going to be an issue. Being a lone-gun may give you the freedom and control you demand, but the only commodity you have is time – and time does not scale well.

So what are the 9 options a lone-gun freelancer has for increasing their income?

1. Work more hours (the Treadmill of doom) – Lets get this option out of the way. This is called the treadmill of doom, because if you work too many hours, you will earn more money, but your health and personal relationships will suffer. Also, if you end up working too many hours, your productivity will tail off and you will end up working harder just to produce the same quality/quantity as working a normal day. Working more hours for money over an extended period of time is just a treadmill to failure.
2. Work smarter hours – Whilst I said time doesn’t scale well, there is the option of making better use of your time. If you have to commute to a customers site, can you reduce the commute time, work from your house, or work (on other projects) whilst commuting? If you can fit more work hours into the same time period, you should have both a productivity boost and therefore an income boost.
3. Double your rates – Maybe doubling is a little extreme, but raising your rates will generate more income. Yes, you may lose customers, but as long as you are not relying on just one customer, this may be for the better. Lets assume you have 4 customers, you double your rates and as an effect you lose 2 customers. You will be doing half the work, for double the money, thus earning the same for half the effort. You then have half of your working time free to fill with new and better customers, thus doubling your income.  Test an income rise on 1 or 2 selective customers before committing to an all out price rise.
4. Expand your team – Another option is to take another person on and expand your team. The trick is, the costs and associated risks must outweigh the extra income they could generate. Whilst the majority of the cost will be in salaries and tax, some associated costs (accounting, finding work, etc) will already be factored into your existing costs. However, your main concern will be making sure that there is always enough work now AND in the future to pay for them, otherwise they become a burden on your business and will cost you more in the long term.
5. Cut the costs – I have talked before about cutting freelancer business costs. Whilst the effect will be minimal in the great scheme of things, cutting back on business spending will make some slight impact to your bottom line. Its always worth doing a regular cost review exercise.
6. Do the same work faster – My second favorite way of increasing income is to work faster. The vast majority of my projects are performed on a fixed project price basis (rather than quoting day rates and number of days). Therefore when I am able to quote for work to take 20 days, but in fact able to complete it in 10, the extra time means I can do more chargeable work (and therefore get paid twice for the same time). My method for working faster is to reuse existing work wherever possible.
7. Move from service to product – A logical leap that many freelancers try is the move from providing a service to providing some sort of product – normally some form of software; either mobile, PC or cloud based. This can make sense if you can find something very unique that people want. However, I have yet to see somebody who has pulled this off and is actually making enough money to support them fully and allowed them to move away from selling solutions or services. Clearly it can be done, as there are plenty of software product companies out there – but these are the exception rather than the norm.
8. Passive Income from existing customers –What we are talking about with this option is providing either a product or service to a customer, and then negotiating to retain the customer through a Support and Maintenance contract. The customers pay you a passive income amount to support the item that you have already provided. Support and Maintenance charges is how big software companies are built.
9. Get a passive income – The final option is to generate an additional stream of money via some form of passive income. Many people suggest sell-able things like eBooks, on-line courses, WordPress templates, Mobile phone apps and the like. However, in a word when we are so used to getting things for free, the effort in creating such items to sell may never recoup the investment. That said, there are other ways of generating passive income, which I will talking about later this year.

So, will any of these options allow you to generate additional income?

Last week, my business made £1,180 from a customer without doing any work. All it took was for this particular customer to pay their invoices late.

I know that Late Payers are a constant worry for the majority of freelancers and small businesses. The majority of my own customers pay late. However, on the whole, my late payers are only 2 or 3 days late in making their payments – which I can live with.

But this one customer was over 80 days late in their payment, and the amount was large – very large. In fact, the original invoice was nearly £60,000 in value. As you can imagine, when the amount is so large, and with payment being so long overdue, it can lead to a lot of sleepless nights – will they pay at all? Will I have to take them to court? Will they eventually turn around with 1,000 reasons why they are not paying (delivery was not as they wanted, etc)? In short, would I ever see the money?

I had a signed contract – so was covered from that point of view. In the contract, it talked about my terms and conditions, which included my late payment penalties – so was covered there. And my online accounts system (the wonderful FreeAgent was regularly sending them chase notifications).

After the invoice was 30 days overdue, and after a lot of worry – I bit the bullet – and raised a late payment invoice for 30 days of interest (8% over the base rate – so maths = (((amount of invoice + 8.5%)/365 days) * 30 days) plus my £50 admin fee.

30 days after that, I raised another 30 days of interest and another late payment fee, and then a third late payment invoice. They now had four invoices outstanding (the original plus 3 late payment invoices)

After the third invoice, it did seem that I was wasting my time – I was calling them and was being given more and more complex reasons for the late payment (we have a new accounts system, the payment manager is on holiday, its in the next payment run) – I even started to research on Google which debt collection company would have the most success (and which would cost me the least).

And then, guess what…. they paid. There was no email or call or anything – the money just magically appeared in my company bank account. Not only did they pay the original invoice, but also the late payment invoices – so an extra £1,180 into my bank for no effort from me.

And you know what – that’s more money than I would have gained in interest in having it sit in a bank – so I am very happy.

We all suffer bad payers – but don’t give up. Chase, chase, and chase some more. When things get too much, threaten and then do it – raise that late payment invoice. Don’t put up with those late payers. And don’t wait until they pay to raise a late payment invoice – raise one a month – it acts as a reminder to pay the original invoice (and that you are serious).

As long as you have a signed contract and a clear set of terms, the law is on your side.

When I am contracting on a customer site, one of the things I find most helpful to me is the alarm on my watch.

As per my last Freelancing verses Contracting post, with contracting we are being paid for our time, not for the products we produce.   So when I contract, it makes sense to me to ensure that I leave their offices each day as soon as the agreed hours have been met.

That may sound harsh or inflexible, but look at it this way – if a contract for resource time is for 7.5 hours a day and you end up skipping lunch and staying for an extra 30 minutes at the end of every day, that can add an extra hour or 90 minutes of effort a day.  Over a week this can add up to 7.5 hours – or an extra day of work.   You are not being paid for that time, so what you are effectively doing is either discounting your rates by 20%, or you are reducing the length of the final contract by a day a week.   If you do an extra week a month of unpaid work, its one week sooner when the contract will end (or wont get renewed).

Of course one of the problems of leaving on time is that you are running out of the door when the permanent workers may still be working.  But wait a minute – they are doing that not for the love of the work – they are doing it in the hope of a pay rise, or to further their career or just to keep their jobs.  As a contractor, you have none of these to worry about.  So why shouldn’t you leave on time?

I have found the best method of easing into the ‘leave on time’ is to initially work the hours agreed plus a bit more for the first week, and then to explain to everybody how I will miss a transport connection by leaving after the agreed time (oh the traffic is so bad after 5:15pm around here, oh I just miss my train connection, etc).  Then make sure you leave on time.  But to signal the exit by setting a discreet (but audible) alarm on my watch to signal and remind me when its time to end the day.

That way you do the hours, do the job, but your alarm is the one nagging you that it’s time to go.

Of course some contracts do pay overtime – in which case this is not needed.   But generally that’s not the way contracts work – you have a day rate for a fixed length of day.  So stop robbing or short changing yourself, and get out of the office on time.

PS – In case you are worried that this may effect any contract extensions, I have used this system on all my previous contracts, and never have I not been renewed or extended.

At the end of January, I carried out my companies year end.   Using the small business accounting package (Freeagent), I was able to complete my year end accounts in less than an hour, and passed the figures to my accountant for sign off and submission.   Job done!   Then once everything was complete in my year end, I did some detailed year end analysis, looking for trends, costs which could be reduced, small profits which could be nurtured in the new financial year, and any other changes that I could make for the better.

Once my analysis was complete, I then did something which I have never done before – I fired 4 customers!

You see, by using the timesheet analysis in Freeagent and comparing the time spent on the customer against the revenue they had brought in, I worked out that these 4 customers were costing me money to support them.  The effort of support, answering emails, quoting for new work (work which was never taken up) and other day to day maintenance did not meet the invoices I raised against them.   Put it another way, each of these 4 customers was a drain on my company.

Worst than that though – not only were these 4 customers costing me money to support them, but they were actually taking up the most expensive commodity I had – time.  Every moment that I spent on their maintenance, was hours and days which I could not spend on new or more profitable customers.

So one at a time, I called up the principle contact for each of the customers, and as I say, I fired them.  In a nutshell, I said “Sorry to trouble you, but I have been going through our records and it appears we haven’t done any real business in the last year or so.  It also appears we are spending a lot of time providing free maintenance for you in the way of emails and other support, so I regret that we have reached the point we need to terminate our relationship”.  Yes, I know – fairly heartless right??

The effect of the conversations was as follows:

One customer got really upset.   They was some name calling, they hung up on me, and I have never heard from them again.

The next two customers said they understood, they could see my point.  They said that their finances did not allow for any new purchases, so there was nothing they could do.  They asked for a hand over meeting (which I provided free of charge), and they were happy to call it a day.

The final customer of the four was shocked.  He didn’t realise that his staff called on my company so much, and was very apologetic.   He asked for a figure to provide the support to them for a year, and promptly raised a purchase order.  They remain a customer – and I now get paid to answer their query emails, to raise quotes and attend meetings with them.

But the point is, by removing the non-profitable customers from my customer pool, my company has gained some 180 hours or so of extra time a year which can be directed to profitable customers and projects, with no impact on my balance sheet.   Now you can say that maybe I should have held on to them until a new customer came along to replace them, but then where would the 180 hours come from to allow me to deal with the new customers?

I am also in the process of firing a pet personal project – a project which I spend a little time on yet doesn’t generate any revenue or return.   It’s not easy because I have invested time, money and effort into this project, but it’s important not to get emotionally attached to customers or projects.  If they are not working.  Much better just to cut the ties and move onto something which is more fulfilling, responsive and ultimately profitable.

Don’t you think?

If you happen to follow me on twitter, you will have seen that I have been on holiday in Kenya.  Whilst I was there, I landed 2 new sales – actually the quotes had been sent out just as I was flying out on holiday, but I got the email confirmation whilst I was out there.  In my business we have a rule – we get a new sale and we do a little dance to celebrate.   As both emails arrived, my wife and I did the ‘new sale boogie’ on the beach with cocktails in hand – nice!

So how did I find these new customers?   Google Adwords!   Let me give you some numbers for the adwords campaign since I started it in early September…

• Adword Campaigns running (groups of search terms) : 9 – see the screen shot of my ad groups
• Total impressions : 9,988 (as at the time I type this now)
• Total Clicks from ads : 60 (again, as of now)
• Cost of the clicks : £163.57
• Enquires from clicks : 23
• Confirmed Sales : 2
• Ongoing conversations : 7
• Value of the 2 sales in total : £34,600!!

Not a bad return – £35,000 of sales value from £163 marketing cost and 6 or 7 hours of time.   So I am here to say, Adwords does work….. if you do it right.

I have posted about Adwords before, saying it can get out of control – and it can.  It’s like a wild animal, you have to keep your eye on it, keep grooming it (refining the styles, ads, words, etc), pull it back when it goes too far, and most of all, get it house broken when you first set it up.

Yesterday I wrote about defining your ideal customer – and this is the most important bit.  Once you have your ideal customer defined, you can then plug this into adwords – for EACH AND EVERY advert group you run, set the restrictions as much as possible on things like view times (mine run Monday to Friday, 9am to 5pm), location, language etc.

Other things I recommend when using Adwords are:

• Use Adword rotation – don’t just have one ad per group – have 3 or 4 to rotate, turn off the google optimisation of placement (where it only uses the best), use them all, see which is the worst performing, then change the words to make it more attractive.
• Change the bid amounts to be lower than the suggested average Price Per Click (PPC) – you will still get exposure and clicks, but for less money.
• Turn off (in the settings) under Networks the Search Partners – stick to the main Google Search.  Also, change the Display Network option to Relevant pages only on the locations you manage (so google takes account of your previous location/language settings)
• When you get an enquiry from your call to action on your web page – follow it up as soon as possible.   Whoever tries to contact you, they will also be contacting other companies so you want to be the first to respond.
• If you have never set up Google Adwords before, get a book on how to do it properly (or sub-contract the set up).
• Keep control of your costs.  If you link your Adwords into an online accounting system (such as the fabulous FreeAgent), your costs will be imported for you and will detailed in the accounting analysis.
• If you run Google Analytics, link the Adwords to Analytics (in the Analytics site) – this will then provide further information on which search terms and adverts are working best, bounce rates per advert etc.  All of this can be used to refine your adverts and improve the return on investment.

If somebody asked you to define your ideal (or target) customer, could you do it?  Have you even given it any thought, or is it one of those business concepts which are there for the big boys, and you are really looking for anybody, anywhere, that has money to spend and needs your service or product?

The reason I ask, is that earlier in the year, I had to define my ideal customer – for a number of marketing activities, and it was a difficult exercise for me.   I provide IT database software services to companies with… well…. databases.   Should that not do?  Does that not cover it (I asked)?  Actually, no – it turns out that being vague is one of the worst answers.   Without defining the target, how could I hope to know my customers when they come along, or hope to get my message across to the right people.

Take for instance, the concept of location.  That’s a fairly easy one I guess for most people.   They will say that their target customer is say, in their own country, or if you are completely virtual -anywhere in the world.   But let’s think about this.  If it’s anywhere in the world, do you want to deal with people in countries that can’t speak English?  And what happens if it all goes wrong?  Do you really want to travel around the world to sort out a problem for a few hundred pounds of sale value?

So I started to get specific.  I realised that because 90% of the time I have to meet the customer at some time, I didn’t really want to travel to Scotland, or Wales, or Ireland, or even spend 7 hours travelling too far north for a prospect sales meeting.   So I worked out that for me, my ideal customer lived within 127 mile radius from my home office.   I know that sounds specific – and it is.  127 miles from me, is 2 miles off of the French coast, yet includes major UK cities – London, Bristol, Birmingham, Southampton etc.  127 miles can be travelled in a couple of hours.   If I said 130 miles, I would be getting prospects in Northern France, if I said 120 miles, I cut off half of Bristol and Birmingham.

Once I had this concept sorted, the rest fell into place.   Other categories which I then defined were:

• Language – English speaking
• Company Size – over 30 people, but less than 200 (don’t want to waste time on small SME’s with little budget, nor go for the bigger companies that the big consultancy companies target)
• Industry – Private sector or NHS (my services don’t work for charities, or government offices, etc)
• Turnover – from £100,000 up to £5m – again see the company size logic
• Type of person I need to speak to – IT manager, information manager, Development Manager, CEO or MD
• Working Hours – Monday to Friday 9am to 5pm (don’t want to be working for companies that only operate at weekends, or out of hours)
• Requirements – Must use databases such as SQL Server or Oracle, maybe smaller databases like access, Informix or DB2

I could go on, but suffice to say that by defining as many categories as I could, and then refining them down as much as possible, when my ideal customer appears I know them and know that I can work with them.

Now it could be argued that by creating restrictions (such as location) I am reducing the number of potential customers, but then do I really want to travel 600 miles to Scotland or Ireland to try and sell my services, when there is a person 40 miles from the prospect who has a better chance of the sale and less costs to service them?

Tomorrow, I will talk about how I used the above information for land £10,000’s of revenue for less than a £100 investment.

If you haven’t spend the time to define your ideal or target customer, take 10 minutes and define them now.  I promise, it’s worth the effort.

I have just returned from a wonderful 3 week holiday to Kenya.  It was great not only because of the wildlife, relaxation and the time away from small business hassles – it was also good because it gave me 3 weeks to reflect on my small business and where I wanted to grow.

During these 3 weeks, I found myself propped up in a bar in Nairobi, chatting with another business owner (also on holiday) who was doing very well for himself.   We got chatting about business (as you do) and I asked him the question I always ask other business owners – “what is the one tip you would give small business owners”.  Unlike other answers I have heard which talk about cash flow, or invoicing, or getting your USP sorted, this one had a different answer.  Which was…

Don’t be scared of the word NO!

Without repeating the entire conversation here, he went on to explain that without doubt, the biggest problem small business have is staying true to themselves, staying on target to their goals, and not being dragged into directions and projects that do not fit with that the company does.  Therefore (he explained), if you are not happy with a project, if a customer wants too much, if a work co-worker walks in and asks for help (interrupting you), if an employee pushes the bounds or you feel you are being pulled in the wrong direction, don’t be afraid to say “No”.   Many small businesses are just so grateful for the money or so scared of making the wrong move, they will agree to anything or at least try to turn it into an advantage for them, even though the right move was to just say no and walk away.

However, he said it was a bit more complex than this.   No (he said) was a harsh word – a brutal full stop of a word.  “No” can cause resentment, embarrassment, arguments and hostility.    So when using the No word, the other word to use is “Because”.

Because is the reason.  Because tells the story and keeps things friendly.  Because makes it a professional decision.

If a conversation went along the lines “Can you create a product for me?  No!”, it’s the end of the conversation.   But, if the answer is “No, because this is not what we do, but let me point you to somebody who can” – this sets your credibility and keeps the door open for doing what it is your company does best.

One of the hardest questions that a contractor, freelancer or a small business owner has to answer is how much to charge for your product or service.   Even if you manage to initially answer the question, it’s not something you can set and walk away from; pricing needs constant reviews to make sure you are making a profit, that you are generating business, and that the competition is not taking your sales.

There are all kinds of ways to work out the cost model for your product/service, depending on the uniqueness of your offering, and how you want to generate revenue.    Whilst not every option will work for every service, the following are the most common methods of working out the sales cost for business:

Cost by Return
The most common method is the cost by return – how much you need to sell a product for and by how many to cover the costs and make a profit.  For contractors or freelancers with a service, this is normally your yearly costs (salary, tax, etc) divided by the number of workable days (242 when you take out weekends, public holidays and 4 holiday weeks a year).   For manufactured or web based products this is more of a tricky calculation as you need to get a balance between number of units sold multiplied by a price, to see if this covers the material/creation costs to provide a profit.

Cost by Competition
Another simple way of pricing a product or service is to cost by competition; what others are charging for a similar product or service.  Again, for contractors or freelancers this is easy, as the typical day rates will be listed by agencies or job sites.  For small business, it can be a bit more tricky as it means speaking to competitors to see what features their version has and its price.   Also, it can be difficult to find a competitor with a true like for like service, but it can give you an indication of what ball park figure you need to charge.

Drop Your Pants
Not sure where the business term of “dropping your pants” comes from, but it basically means selling as cheap as you can in the hope of winning lots of business and therefore make profit through quantity of sales.  One disadvantage of this approach is that no matter how cheap you can sell for, there will always be somebody cheaper.  Plus, some customers will actually stay away from your products through a drop in perceived value.

Ad Generated Revenue
This is the principle of the internet and smart phone applications – provide it for free with lots of advertising, in the hope that you will get sufficient traffic which will lead to a relatively high number of advert clicks which in turn generates revenue to cover the costs.   Personally, I have never met anybody who has made money from this method (I would really love to hear from somebody who has), so I consider this a very, very high risk gamble.

Freemium
Freemium products are becoming more and more common.  Freemium is where your product comes in two forms; a free to use version (with or without the ad revenue generation as described above), and a premium version with more bells, whistles and functionality.  The idea is that people use your product for the free version, become hooked and some will eventually pay you for the premium content.   With this method, more thought needs to be given in the cost of the premium version as not only do you need to work with the cost/conversion numbers, but you also need to factor in the features you add (or hold back) to differentiate the two modes.  Some companies even make this more complex by providing different scales of premium content.   Whilst Freemium is highly used now for a lot of products and services, get the numbers wrong (and there are a lot of numbers to juggle) and your business will not last long.

Premium
At the other end of the pricing spectrum is the premium cost offering.  A lot of brands actually market themselves as a premium product or service, with one expensive price tag in return for an implied quality above and beyond the competition (look at brands such as Stella beer, Twinings Tea, BMW, etc).  If your message is strong enough, this can be a good tactic as it means you need fewer sales to make a profit, and will not get distracted by the customers who will spend less money.

Need First Curve
The Need First curve is ideal for companies with very exclusive or sought after products.  The idea here is that on launch, the price is high as people demand the service and MUST have it regardless of cost.  Then, once the must-haves have been dealt with, the price is generally lowered over time with the excuse of ‘cheaper production costs’.   Brands that have used this in the past include Apple (iPAD, iPhone, etc), Sony with the PS3, Microsoft with xbox etc.   If your product or service allows for this curve, then congratulations.

Tempt in Curve
As the name suggests, prices are set cheap for new customers by the way of promotions, discounts and trial offers, and then raise once they are hooked and know the quality of your product.  A large number of both product companies (i.e, printers which are cheap, but have high ink costs) and service companies (i.e, Sky television, free box for new customers) use this technique.

Ask the Customer
The method of costing that I like more than any other is asking the customer.  Its simple – find a target customer (or a handful), put a price structure together and ask them if they would pay.   Feedback from customers is the best way to find out if the price structure will work – if they tell you its too expensive, ask them what they would be willing to pay.

Try Different Mixes
But if in doubt, why not try all of the above, and mix it up.  If you have a web site with your price list and a ‘buy now’ button, have different web page versions to rotate and see which makes the best sales/profit margin.  If you are making real face-to-face sales, try some quotes as low ball, some as premium, some with an introduction offer, some with your calculated return price, and see which sells and makes money.