How to put a price on your work
Posted on 2015-06-08 12:12:12 by CScaleTeam
When you start your own company you start it with the idea to make a reasonable profit. I'm saying 'reasonable' because a 'little' profit may not be enough for your investors. I'm not even going to bring up not having any profit at all. With time you're going to want to expand in order to get a larger profit.
But where does this profit you seek come from? On the most basic level your company buys some goods from other people or companies, gives these goods to its employees, who work with them and produce other (more valuable) goods that you need to sell for a price that will cover the price of the initial goods and the paychecks of your workforce plus your most desired profit. But someone needs to buy your products and that someone is either a person getting a paycheck from some company or another company that also needs to make a profit. The whole thing seems recursive and it seems that something is wrong with this picture. In the end it has to stop somewhere, right? There are no infinite value products out there and you know that some companies do lose money.
Well... they say about the world economy that it is a positive sum game, that value is always being added and the usual example is that the sun keeps shining giving us energy, rivers keep flowing feeding power plants everywhere, there's still coal and oil beneath the Earth's surface, while fruit and vegetables still grow above it.
But the greatest value added to our economy is the work that over 7 billion people put in every day. That is our greatest source of profit and that's the reason why, at least in theory, it should be possible for every company in this world to make a profit. So how can we put a price on that? It turns out we do that quite easily.
We pay our employees based on their level of experience and company position. Every employee knows the job market reasonably well and they also know how much they expect to get payed based on how much other companies pay people in their position. In the end their paycheck will cover the things they need to buy in their daily life and will fall short of the things they dream to buy. We could say it will cover their expenses and will provide them some 'profit'. Our suppliers will also come asking for a price that they base on their expenses, expected profit and market value.
I think a better approach would be to also factor in the impact that our work has, both as employees and as suppliers, on our customer's profit. If my profit margin is beyond what my customer can afford at the moment it's probably a good idea to cut it down for a while and help the customer get his business off the ground, instead of having him declare bankruptcy or outsource the job to someone else. Hell, if it's a one time short project, I can even do it for free for good karma. Overall it just means you sacrifice immediate profit for the sake of the future profit. But in order to do this you need to communicate with your customer and know the status of his business. You should know his bottom line almost as well as you know yours and take a decision based on whether you think he'll recover or not.