Is there a logical way to come up with pricing for a service such as below that my friend came up with. Are these valid ?
Finally he had this equation.
value of per day = last salary / 20
+ 50% charges for taking responsibility + 30% appreciation for
every year since your last payment
One caution, look at this from a value perspective too. Calculating number of hours and average rate per hour and all the other stuff mentioned above is fine. And if you're providing the same service as others you'll have to be competitive so that may likely be the way to go. But when possible a value-based approach sometimes makes more sense and could be better for you.
A simple example. I've done a lot of marketing consulting. I know what others generally charge per hour for similar services. So let's say that's $125/hour. If someone wants me to review their marketing plan and provide feedback however, which might take me an hour to do, the value is way beyond $125. It might be worth $500 or more. I am going to provide way more than $500 worth of value to them because of my experience and ability to provide tangible feedback that will help them better succeed. (At least that's the idea!)
So that may or may not apply here but in general terms I often see people who might be able to charge from a value perspective come at it from a cost plus perspective and sometimes that's going to not be in your best interests.
Best of luck,
I don't think that there are any concrete formulas for coming up with all kinds of pricing, but I do think there are guidelines that can help.
Structure your price with how your target customer buys. If your target is used to receiving invoices with hours billed, it would make sense to come up with an hourly number to bill them with. If your customer always purchases things upfront for a year (because they're a bigger company) present your price so that they can see it annually.
Charge the most you can. :) Unless there's only one target customer for your business (in which case you probably have other problems) you should test your pricing on each new client. If you've decided that you charge by hour, find other options that would be valuable to the customer on an hourly basis. Test, test again, and test one more time until you find out what the market can sustain.
Simpler is almost always better. I'd say its fine if you want to come up with your own complex way for generating the price but whatever you do make sure that you're giving the customer a simple pricing structure. This makes it easier for them to explain the price to others and gauge their own expectations around what a large vs. a small buy might be.
Your list is good. Another way to look at the effort is by categorizing into top level activities such as
I have two approaches for you to set the price for your service.
Method (A) is simple and unsophisticated. Get the customer to tell you how much they'll pay, and take their offer (unless it's ridiculous). Then, raise your price somewhat and try to get another gig doing the same thing. Keep repeating the loop until people balk at the price. You've hit your optimal price.
Method (B) actually requires planning ahead of time :-) You'll want to figure out (1) How much does it cost you to provide the service, and (2) How much is the customer willing to pay.
Costs to provide the service includes everything you can think of. Your computers, rent, food, living expenses, cost of living, the cost of the coffee you drink, any software you need to buy to do this. Then amortize those costs over the amount of clients you'll be servicing. So if your costs are $3000/month and you'll be serving 10 clients a month you need to charge them at least $300/month each. Above that you are into profit.
How much is the customer willing to pay is harder. There's lots of resources on sales to help. But some simple advice is:
Finding out this information is part of negotiation, but in general the best thing to do at the beginning is just ask them straight out.
This is a decent approach for a cost-based price, although I agree with other answers that you'll want to present only a very simple version to the customer. The risk is that depending on how valuable your service is to the customer, you could leave a lot of money on the table or losing the work based on your price.
Can they go to someone else to get it done? If so, you need to consider competitors' pricing. If your price comes out much higher than the competition, you need to justify why your service is better. If on the other hand you're much lower, that might be a great competitive advantage for you, or you might want to raise your price.
If on the other hand you're the only one who can perform this service (e.g., you're an ex-employee, and no one else understands the systems as well as you do), you can charge a big premium. This kind of scenario is much more rare. Even if you think you're one of a kind, you have to convince the customer too.
The bottom line is that you should do a cost-based estimate as you outline, but make sure to consider how much value you're bringing to the customer and how price will affect your chances of closing the deal.