The second method for determining your price is to figure out what it costs you to offer and support a membership and then add a nice margin on top for your value.
This is not the best method for coming up with the price for your membership. However, when combined with other methods that take into account customer expectations, figuring our your time and materials cost will let you know if your pricing is reasonable for your business. Most importantly, figuring out the cost of each member will tell you how much you need to charge at a minimum to make money.
An Example
What would it cost us to support 234 support members, 12 hosting members, and 1 VIP member?
So far, for every 10 members we have, I’m spending about 2 hours of support answering forum posts, emails, and phone calls each month.
I’m going to assume that I can hire someone at $25/hour to take over this work. So my costs for this would be about 50 hours per month x $25/hour = $1250/month.
For hosting accounts, the cost of the server (and server maintenance) is about $40/month per user. We expect to spend about 12 hours per new member setting up their website and then we offer 2 hours per month of support. Members won’t need support every month, so we’ll say the average member requires about ½ hour of support per month. If we hire someone at $50/hour to support these members, we’re spending about $65/month per member. Times 12 members, that’s $780 per month.
For VIP members, the cost of the server and maintenance is planned to be about $300/month. We expect to spend about 30 hours setting up a new website and an average of 2 hours per month of support. At $75/hour for support on these clients, we’d expect costs of $637.50
Then we have other costs that are fairly independent from our user numbers. To post to our blog and maintain our documentation takes about 15 hours of my time per month. We’re spending about 40 hours per month developing the plugin, and maybe another 10 hours or so per month doing marketing. At $75 per hour, this comes to $4875/month.
All told, that’s $7542.50 per month it will cost to support these members. Let’s double that so we’re making more than $75/hour on our time, and making a nice margin on our contractors, and have extra money to pay for advertising and other business costs.
We need $15,000 per month, but would do okay with $12,500 per month (which is enough to replace our consulting number). We can tack 20% on to our earlier numbers to reach this new goal.
What did we learn?
More important than that overall number, we learned that excluding fixed costs, we need at least $5 per support member, $65 per hosting member, and $650 per VIP member. To cover fixed costs, we need about $20/member per month (that’s $5000/250 members). We can skew this towards the higher tiered members. So, e.g. $15 extra for each support member, $65 extra for each hosting member, and $300 extra for each VIP member will about cover it.
These are the minimum prices we can charge for our memberships here. And after doing these calculations back in October of 2011, I raised our prices on the basic support level from $10 to $19.
More on Pricing
Read the entire series on pricing.
- How much do you want to make?
- Time and materials x margin. (This post.)
- What’s the value of a membership to your customers?
