How Much Should I Charge for My Services? How to Set Your Rates as an Artist

finance Mar 10, 2021

Underpricing is one of the most common reasons self-employed people struggle to meet their financial obligations and pay themselves. But, figuring out how to price your services is one of the hardest parts of building a business.

Price your services too high, and you risk isolating your customers. Price them too low, and you’ll have a hard time covering your costs and expenses.

So how do you set your prices so that your business is financially sound? And what do you do when imposter syndrome and negative thoughts make you second guess your pricing model?

We broke it down for you in a handy template which you can download for free right here.

Read on to learn how to calculate your prices sustainably for your business and you, the owner.

REACTIVE VS. PROACTIVE PRICING

The biggest pricing mistake people make is setting their prices reactively. There are two types of reactive pricing: external and internal.

External reactive pricing is when you set your prices based on factors external to you, such as basing your prices on:

What others in your industry charge, like your colleagues or competition
What someone says you should charge, like your business coach or biz bestie
What you used to get paid when you were an employee

Your reaction to external messages about pricing is the basis of your pricing model. That doesn’t mean you don’t have to research your market, customer, competition, and industry, but these aren’t the only factors to consider when you set your price.

Internal reactive pricing is when you set your prices based on negative messages that you tell yourself or limiting beliefs. Yes, this is where the hard pricing stuff kicks in. Examples of internal reactive pricing are telling yourself:

I’m not good enough
I’m too new to my industry
I don’t have [insert long list of skillsets] yet
Nobody would pay this much to work with me

Internal reactive pricing is challenging because it’s not as simple as tuning out the noise around you. It takes real work on your emotional relationship to value, worth, and money to truly stand up to these negative beliefs. If you’re new to working on your relationship with money and pricing, start slowly by noticing how and why these beliefs get triggered.

Pro-active pricing is the model we’re striving for and is how you practice intentional pricing. Proactive pricing means that you set your prices based on real numbers in your business and clarify what your prices cover. In other words, you’ll do some math.

Before you let out an epic groan, the little bit of math you’ll do is worth the effort. Using pro-active pricing, you’ll ensure that your prices are sustainable for your business. Plus, knowing the “why” behind your prices makes it easier to state them with confidence and stick to them.

And if math is still something that scares you... In my course I explain why you don't need to be good at math to handle your business's finances.

But let's move on to...

Prep work

Before you start calculating your prices, it’s helpful to gather a few things. These materials will ensure that your pricing is accurate and that you’re not interrupting the process every time you need to look something up.

Here’s what you should have before you begin:

A list of your services. These can be billed for hourly or a package rate.
Your annual gross revenue. If you’re a new business, you can use your year to date revenue or projected revenue.
Your annual operating expenses. Again, if you’re a new business, you can use your year to date operating expenses or projected operating expenses.

If you’re using our pricing spreadsheet, enter these numbers on the Start Here tab.

THE PRICING FORMULA

Step 1: Cost of Services

Most people start their pricing with what they would like to be paid, like $100 per hour. But before we talk about what you want to get paid, we need to address what you need to get paid.

Cost of services (COS) is the direct cost you incur for performing your service. These aren’t general operating expenses, like your Zoom subscription, but expenses directly linked to the services you sell. In other words, each time you perform a service, you incur a cost.

Examples of COS for service providers are:

Direct labor: This is someone you hire to help you perform your service. For example, if you’re an event photographer, the second shooter you hire for each job is a COS.
Rental equipment: This is the equipment you rent to deliver your services. If you rent a second camera every time you shoot an event, that’s a COS.
Software or licensing fees: These are only fees that you incur on a per-service basis. For example, as a photographer, you need Photoshop to edit your photos. That’s an operating expense because it’s not tied to a specific job. But, if you pay $20 to host each client’s images, that’s a COS.

COS is the foundation of your pricing. At a bare minimum, your prices need to cover your costs and then some. If they don’t, your business will lose money.

The first step to calculating your prices is to list your COS for every individual service. If you’re using our pricing spreadsheet, enter your COS for each service you sell.

Not every service has COS. If you don’t have COS for a service- that’s okay! You can leave that table blank and move on.

Step 2: Overhead percentage

Overhead percentage is the percentage of money from your sales that pays for your operating expenses. For example, if your overhead percentage is 30%, then for every dollar you earn, 30% or 30 cents goes towards your operating expenses.

Like the cost of services, we want to ensure that our pricing is sustainable for our business. That means our prices cover our costs and our operating expenses, which is why the second step is to calculate your overhead percentage.

Your overhead percentage is:

Expenses / Gross Revenue = Overhead Percentage

If you’re total expenses are $30,000, and your gross revenue is $100,000, then your overhead percentage would be:

$30,000/ $100,000 = 0.30 = 30%

If you’re using the pricing spreadsheet, you already entered these numbers on the Start Here tab, and the spreadsheet calculated your overhead percentage. Your overhead percentage is displayed under the COS table.

Step 3: Baseline price

Your baseline price is what you get paid. Your baseline price isn’t the same thing as your final price. Your final price will include your cost of services and overhead percentage. Your baseline price will be what’s left after we’ve accounted for costs and expenses. In other words, what is your time worth?

This is the most subjective part of the process- there’s no formula we can use. It’s up to you and your financial needs.

If you work on an hourly basis, your baseline price will be how much you want to get paid an hour.

If you sell your services as packages, then you’ll conduct a time analysis of each package. In a time analysis, you breakdown all the activities related to producing and selling your product in detail. These include:

Performing the service
Communicating with the client
Communicating with your subcontractors
Initial discovery call
Preparing your contracts and reviewing questionnaires
Billing your client
Following up on the service

For each activity related to your service, estimate the amount of time it takes you, then add up your total time. Don’t forget to add a few extra hours of padding! You’ll then multiply the total time by a baseline hourly rate to find your baseline package price.

In the pricing spreadsheet, enter your target hourly rate or your package rate. If you sell packages, you can enter the total hours in a package and the worksheet will calculate an equivalent hourly price.

Step 4: Calculate your price

Now it’s time to put all of these numbers together and calculate your final price. This is the section with the math. If these formulas look intimidating, don’t worry- our pricing spreadsheet takes care of the calculations.

Depending on if you bill hourly or by the package, the process is slightly different.

Hourly pricing

First, you’ll calculate your costs per hour by dividing your total cost of services by the estimated number of hours you will bill. If you don’t have costs, you can skip this step.

Total cost of services / Estimate Hours Billed = Costs per hour

$50 / 10 = $5

In the pricing spreadsheet, there’s a place for you to put your estimated hours billed.

Next, we’ll add our costs per hour to our baseline hourly rate.

Costs per hour + Baseline hourly rate = Starting price

$5 + $100 = $105

Next, you’ll calculate how much you’ll need to add to your starting price to cover your operating expenses. To do this, you’ll multiply your starting price by your overhead percentage.

Starting price * Overhead Percentage = Overhead Contribution

$105 * .30 = $31.50

Now we’re going to add our overhead contribution and starting price together, which will be our final price.

Overhead Contribution + Starting price = Final Price

$31.50 + $105 = $136.50 per hour

Here’s how that price breaks down:

Package pricing

The steps are the same for package pricing, except you won’t need to calculate your costs per hour. Instead, you’ll add your costs of services to your baseline package rate.

Cost of services + Baseline package rate = Starting Price

$50 + $1,000 = $1,050

Next, you’ll calculate your overhead contribution by multiplying your starting price by your overhead percentage.

Starting price * Overhead Percentage = Overhead Contribution

$1,050 * 0.30 = $315

Finally, you’ll add your starting price and your overhead contribution together.

Overhead Contribution + Starting price = Final Price

$1,050 + $315 = $1,365 per package

Here’s how this price breaks down:

At this point, you may need to adjust the baseline price until you land on a price that will meet the needs of your business, your customer, and your personal finances.

And that’s it! You’ve just intentionally calculated a price for your service that meets all your financial needs and (hopefully) feels good for you too. The final step is to repeat this process for your other services and bask in the glory of a price well set.

If you haven't already, click here to download your free copy of the template we worked with in this post. You'll be able to save it to your computer and revisit it for every product or service you're pricing.

Click here to download your free pricing template

Meet the author:

Andi Smiles, small business financial consultant and coach, teaches self-employed people to take control of their finances so they can step into their personal power. She’s helped hundreds of self-employed people organize and understand their business finances, while also uncovering their emotional relationship with money. She is a founding faculty member at Parsons Entrepreneur Academy, and is teaching finance and budgeting for creatives starting in February 2021.

The Parsons Entrepreneur Academy--Powered by the Parsons School of Design--is an online platform dedicated to helping creative professionals learn and master the business side of their professions. We provide community, mentoring and courses created for and by people in the creative fields. Sign-up for our emails and learn how to turn your art into a business.