Let’s talk pricing. Specifically, let’s talk about a really important topic that I feel there is a lot of mystique around, which is how do you decide how much money you should make? I’m talking net revenue here - your own salary or what you hope to pay yourself as the business owner. Should you be aiming for six figures? Should you be aiming for seven figures? Should you just set a goal of $10K and be happy if you reach it?
Today’s episode is a little bit theoretical goal setting and a little bit math. Knowing if your salary goals are reasonable is the first step in determining a profitable pricing strategy and it’s hard to know where to start, whether the number you chose is even reasonable, or why your number may look completely different than someone else’s number.
At least this is what I used to do back in the first few years of my business. Sometimes it worked out, but looking back, I was probably leaving a lot of money on the table by not thinking too deeply about it. When it came time to start planning out my overall income goals and pricing strategy for the year, I would take a look at what I paid myself in the last year and if that came fairly easily to me, I’d tack on another $10-20K, figuring if I raised my prices a bit and kept going at the same speed, that should be doable. If I struggled to hit that net income goal for the previous year, I’d usually just set a goal to make the same as I did the year before.
That’s it. Super scientific, I know. There are so many things I wouldn’t take into consideration, such as the market in my area, other services or products I could be adding or offering, whether my expenses might change, how my marketing was doing, my conversion rates, what was going on in my personal life. Nope. Just, “what did I make last year?” “Okay, cool. Guess I’ll add a little more to that.” And this seems to be how many business owners tackle this question.
For the record, that is NOT a very inclusive way of deciding how much you want to pay yourself in a year. Today we are going to talk about the four questions you should be considering when deciding what to set as your salary goal for the year. Because, honestly, one of the coolest parts of being your own boss is getting to choose your own salary. But you have to be sure that goal is reasonable and fits into all the other financial aspects of your business. Let's dive in.
This is going to be a very good bench mark to begin with because more than likely you’re hoping to pay yourself even more as your business grows each year. At least you know where to begin.
For those of you who are currently at "business ground-zero" - meaning your business is brand new, or you’ve never paid yourself anything before so you have no prior number to start with - this process is going to look a little different for you and that’s okay. The main point I want to make here is that most small businesses don’t turn a profit in the first year. Typically, it takes an average of three years to turn a profit and start paying yourself and anywhere from 3-5 years to be paying yourself a livable wage and salary. Don’t get discouraged, because every business is different and I know tons of creative entrepreneurs that paid themselves a decent salary their first year. Sometimes it’s better just to focus less on a salary number and more on just getting your business out there and then in year two or three or whenever you are profitable, you’ll be able to give a more educated answer as to what your salary should be in the years going forward.
Maybe you are planning to add a brand new revenue stream or launch a new product or service. Maybe you are planning to put some new marketing systems and funnels in place to massively grow your audience. Or maybe you just want to stay consistent with your current business model and there won’t be any huge changes. Any of these options is fine, but it’s good to think about this question and maybe bump up your goal salary accordingly.
Now, if you plan on doing some minor changes such as adding an additional online tool or maybe increasing your ad spend by a bit, that’s not going to have as big of an impact on your bottom line, but maybe you are planning to add a new salaried employee to your team, or maybe you’re planning to invest in that new high-level coaching program you’ve had your eye on, or maybe you’re planning to invest in some new equipment. Those BIG expense changes are of course going to make a difference in what you plan to pay yourself, so if the upcoming year might include some of those, you’ll want to take that into consideration.
Here we aren’t so much looking at your professional life or business changes, but those changes such as having a baby or taking a few months off from your business to write a book. Now, I want to be clear here that I’m not saying that the number of hours you work is directly tied to what you will pay yourself because the goal is almost always to work less and pay yourself more, BUT if you’re suddenly planning to make some massive shifts to your time, that could change things and it’s important to factor that in. There are also other personal life shifts such as moving to a new city or state that might change your cost or standard of living, so that’s always important to consider as well.