Whether it is state run, a private sector operation, charity or social enterprise, cash is the blood flow of any organization; without it, the organization cannot function and will cease to exist. In the same way, an organization with no cash flow isn't able to function properly to meet its objectives. Whether you operate purely for profit or to benefit a community, your ability to identify what people want to buy and at what prices will dictate whether you succeed or fail.
A common mistake made by new market entrants is to basing prices entirely on what people say they will pay rather than what it costs to deliver and be profitable. This approach is both lazy and naive, exposing their business to exploitation from market buyers, while at the same time increasing risks that limit their ability to deliver quality and make a profit.
"If ignorant both of your enemy and yourself, you are certain to be in peril." | ||
| --Sun Tzu, The Art of War | ||
The essence of good price planning is to:
- Gain an understand of what the market wants to pay
- Identify the perceived value of the product or service
- Identify 'who' you can sell to
- Calculate the costs to bring your product or service to market
- Identify the expected client communication and management overheads
- Calculate the cost to deliver your product or service to the customer
- Incorporate your profit margin
All of the preceding contribute to successful pricing in selling products and services when the correct information is captured, highlighting the importance of selecting reliable information sources and factoring margins for error. Some information sources will almost never give truly accurate information; an example being how most buyers will never indicate the maximum price they are willing to pay—especially if they are negotiating the best price from you. In these circumstances, you can look at verifying your data by cross-referencing against other information you capture. For example, the price that customers say they are willing to pay could be compared to their opinions of equivalent product/service prices.
Another mistake made by new market entrants is forgetting to factor in the cost of developing a product or service into their pricing and profit forecasting. The cost to market includes:
- Research and development: Inclusive of meetings, plans, and research to create the product as well as to identify what people want
- Cost of equipment purchases
- Training expenses
- Other costs that may also be incurred depending on your specific product or service
Depending on the country you operate from, there may also be ways for you to reduce your cost to market through:
- Tax credits that compensate business expenses—for example, the UK offers tax reductions to home operated businesses as well as for those operating in sectors such as computer games development
- Costs for professional services such as training can be used to reduce tax—as a genuine business expense, these are not included as part of any taxable profit you make; it is worth checking with an accountant about this
- Equipment costs can be used to reduce tax costs—although some countries such as the UK don't allow an outright tax deduction because equipment is considered as capital and therefore has value to be resold; this is treated differently in the way that the tax reduction is returned over a number of years inline with how the country views the depreciation of equipment capital. It is worth speaking to your accountant about this
Certainly in terms of services aimed at market segments that want or need a more affordable solution, there can be a higher cost to market in order to develop some type of customized component that allows for a reduction in ongoing service/product delivery expenses. Although money can be made through sales, profit is only achieved once any upfront investment for services, equipment, research and development has been recovered.
In addition to the costs for getting your product or service to a state that it can be sold in the market, there are also ongoing costs that scale up as your business grows. These include costs for hiring staff, customer support, marketing, and rent—some of these will be proportional to your sales, while others will have a staggered increase as you hit specific milestones; for example, increasing the size of office premises means higher rent. All of these costs have to be factored into pricing for recovery through each unit sale. This means that if you intend to sell at smaller volumes, your prices need to be higher so that each product/hour unit sold absorbs a bigger portion of your costs.
In summary, your profit is a simple calculation made from:
Profit = Total Sales Value - Cost to Market - (Unit Cost x Unit Quantity)
Don't forget that not all available units will necessarily be sold. Examples where this may happen include:
- Products passing their valid selling dates or relevancy—examples outside of software include sell by date for food and relevancy date for items such as newspapers and magazines
- Sample units distributed for marketing purposes—example samples for journalists to review
- Time that doesn't get booked due to lack of demand, or time spent on marketing and admin activities
Where your business is about using your skills to sell time, an easy method for identifying your daily rate could be to use the following steps:
- Identify how much you want to earn per year
- Identify how many days you can realistically work in a year
- Divide your target earning amount by the number of days you can work
Being overly optimistic with the number of days you expect to sell will result in you not being able to achieve your target earnings. This means that a lower estimate for your available working days reduces risk and increases the chances of you exceeding your target. You also need to incorporate any time you expect to take out for holidays, sickness and anything else that would make you unavailable work; unlike being employed, you don't get paid for these.
Realistically, aiming to earn a full salary in six months of work provides enough margin for three months of the year to be spent on holiday with an additional three month margin for anything unexpected, such as the economy becoming difficult. This means that any time you sell beyond the six month target is what allows you to earn more than the equivalent employed programmer; and rightly so, considering that you are a disposable worker that frees companies from their employment law obligations and other employee related expenses such as training and equipment costs. Smart people don't just aim to sell time, but to make the most from the least effort.
"Great results can be achieved with small forces." | ||
| --Sun Tzu, The Art of War | ||
Earnings you make also need to be structured to cover:
- Difficult times
Being a disposable resource, you are not protected by employment law—meaning no redundancy pay and minimal notice for project/contract termination. As a result, freelancers and contractors are the first to feel the brunt of circumstances such as economic events like the 2008 financial crisis. Make sure you have enough savings to cover any risk of operating in difficult market conditions that.
- Training expenses
Demand for specific sub-skills within programming is always changing. Not long ago, Flash and Actionscript were highly sought after skills for front end web applications, with Javascript being the poor man's choice that was limited in functionality. These days, not only are Flash and Actionscript irrelevant, but Javascript has become relevant to everything from browser-based software through to server side applications development, Internet of Things (IoT) and its use in commercial products such as Sony's PlayStation 4.
An investment into training is not optional if you want to stay relevant; especially if you want to charge higher rates. There are two types of training cost—cash and time. Cash costs are associated with purchase of courses and learning materials such as books, while time is about the time you spend learning and practicing to master the skills. Even where cash costs can be eliminated, learning will always have a time cost that converts to a cash value; time spent learning is time lost from earning—hence the saying of time is money. Make sure to factor time in the year that you expect to spend on upgrading your skills; even if this is in your spare time.
- Equipment purchases and maintenance
Unlike programmers employed by companies, you don't have anyone who will buy you equipment and software licenses for your job. To top this, many employers don't just buy their employees entry level versions, but whatever is top of the range—with upgrades each year. This is an employment benefit that you miss out on by going the self employed route at a cost to your profitability. This is something that your clients save on by not needing to make these purchases—so make sure your rates factor in the value of equipment and software licenses you provide with your service.
Maximizing your earning potential is a big part of the game, so it makes sense to understand how you are valued within the industry. Questions you should be considering include:
- What is the average salary being offered for the equivalent employed role?
- What rates are currently being offered in the contracting market?
- What level of experience do you consider yourself to be at?
- What complementary secondary skills do you have?
- What type of responsibilities are you willing to accept?
- What type of organization are you looking to target?
- How much holiday time do you want?
These are all questions that have a direct impact on identifying a realistic daily rate that offers minimal risk; remember, risk management is about avoiding unnecessary risk and keeping odds in your favor, so always look to maximize your earnings to keep risk low!
With the game being about identifying ways to maximize your appeal to buyers in the market, it's important to know how to package and present your attributes in a way that convinces buyers that you're right for their job. Every buyer is different in some way, even when they share many common characteristics. This means that although you may have already identified market segments to target, your strategy for approaching them may be designed in a way that further specializes in making you appeal to buyers with more specific characteristics.
"He will win who knows how to handle both superior and inferior forces." | ||
| --Sun Tzu, The Art of War | ||
The approach to further specialize in more specific characteristics may be taken more through circumstance than personal choice. For example:
- Where your programming skills and experience can't compete with other programmers in the market, look to compete by combining the use of a secondary skill, or by finding buyers who don't have the budget to attract the best programmers.
- Where you are confident that your skills are competitive with the standards of the market leading programmers, build your rates to reflect the highest prices offered in the contract job adverts you find in your research.
It's easy to make the assumption that buyers only need someone who can write their code, but the reality is that there are many more factors to successfully completing software projects than merely writing the code. Writing the right code to solve the right problem is more important than writing any old code. Code without the right data will never produce the required output. A project that faces interference from political agendas is unlikely to be completed to its full potential, on time or within budget. Projects designed in a way that are unrealistic to deliver within the available time or budget need specific intervention for identifying the minimum viable product. You can see the pattern of these requirements—there are opportunities in every market segment for you to stand out from the competition by emphasizing relevant secondary skills you have that many other programmers don't.
"He who only sees the obvious, wins his battles with difficulty; he who looks below the surface of things, wins with ease." | ||
| --Sun Tzu, The Art of War | ||
While you are likely to focus on a main type of work that earns the majority of your income, such as a contract-based role, there is nothing to stop you from engaging other types of self employed work to fit around this. For example, while your day work may focus on earning money from a contract project, the time you spend traveling on the train and some evenings could be used to work on mini freelance projects such as writing, small websites, apps and provision of services such as tuition. All of this helps to top up your earnings and open potential future opportunities that allow you to evolve your business while reducing your exposure to unfavorable circumstances you can face as a disposable contract worker.