Pricing For Services - I

A coaching firm is basically a professional service firm (PSF), all of which have some unique challenges not faced by other types of businesses. Most professional service firms handle prices based on billable hours, but more creative strategies are emerging that are better for both the client and the professional. We will discuss some of these more creative strategies in a subsequent post and will confine our current discussion to billable hours.

The main question, of course, is how does one arrive at a dollar amount? There are three popular methods. The first is applying a cost model where the coach sets a profit objective, figures in their fixed costs and divides the remaining amount by number of hours to reach a price point.

For example, if a coach wanted to earn $150,000 above expenses per annum, with fixed costs of $25,000 and with 1,000 billable hours per annum, the calculation would be:

$150,000 (net revenue) + $25,000 (expenses) = $175,000 (gross revenue)
$175,000/1000 (hours) = $175 per hour

Another method for arriving at a dollar amount is market value. Market value is the price paid for coaches with similar experience in the same market for comparable services. Most professionals research the current "going rate" and then adjust their fees based on how they believe they fit into the market. A typical situation is the coach who fears losing business by quoting a high rate and consequently assumes they must set a low price for their services to start out. The reasoning is they can raise their prices when they are established. The difficulty is that they have put themselves into a niche and clients immediately start thinking of them as less qualified than their higher priced counterparts. Competing on price is not always a good idea, so one should very carefully evaluate whether setting prices artificially low is a prudent step.

Finally, one can base the fee on what a coach would earn as an employee of a major corporation that has staff coaches. To make a fair comparison, the coach needs to consider salary, benefits, expenses and profit. Unlike staff jobs, coaches are not paid when they are not working. Experienced coaches can rarely expect to sell more than 1200 hours of their time a year and a base of 1000 hours a year is probably more realistic. The rest of the time is spent marketing, improving skills, keeping records and other non-billable tasks required for running a business. If an entry-level staff coach makes $90,000 per year, this would work to an equivalent hourly fee of $90 per hour considering salary alone.

Typical benefits include FICA, health insurance and retirement as a minimum. For most corporations, the value of fringe benefits is estimated at 30% of base salary. When these benefits are added to the coaches’ base of $95,000, the annual earnings become $123,500, which ups the hourly rate to $123.50.

Typical expenses include rent, computer equipment and supplies, utilities, postage and transportation, to name only a few. A conservative estimate for expenses is $25,000 a year. When these expenses are added to the previous figure of $123,500, the annual earnings now become $148,500, which ups the hourly rate to $148.50.

Since coaches are taking risks as any entrepreneur, they have right to a profit, which typically ranges from 5-15%. This arrives at the final hourly rate rounded to $170.00. Recent coaching surveys show that most executive coaches work in the $150 - 300 per hour range. After a careful analysis, our rate calculation appears entirely reasonable and justified. However, the perception of the client matters and many clients will quickly multiply the hourly rate by 40 and again by 50 to get a rough estimate of the annual fee. Under these assumptions the rate may appear high. One solution is to use the hourly rate to arrive at an estimate for the total engagement. Future posts on pricing will focus on just this along with other more creative strategies.