Few aspects of business management evoke as much anxiety among new entrepreneurs as finding the right price to charge for products and services.

This is a point on which the founders of student-run microenterprise groups can relate to their clients. Like the business owners they serve, the students who drive these groups often struggle to determine how much — if anything — they should charge for the instruction and financial products they offer.

Why you should charge

In this guide, we’ll cover the various services groups have to offer, analyzing how to price each. First, though, let’s address the elephant in the room: poverty.

The clients student groups serve are almost always individuals of modest means who struggle to provide for their families. This, in most cases, is precisely why they have embarked on the entrepreneurial adventure with which you propose to help them. Many college students, especially those who have never lived in poverty, feel a strong aversion to taking money from clients who have difficulty to make ends meet.

This aversion does a disservice to clients and students alike. To be clear, no student group should — like the payday lenders with whom they compete — gouge low-income customers in the interest of quick profits. It’s unsustainable and exploitative. But unless student groups charge something for the services they offer, clients will take these services for granted. Also, the students who provide them will fail to hold themselves to a high enough standard to achieve substantive impact in their communities.

If you offer a client a free business training class, you’re asking for her time. If you require her to pay for it, you’re asking for her
commitment. A paying client is more likely to attend every class, complete the homework, and, most importantly, gain the knowledge and confidence your course seeks to impart.

If you ask a student to teach a course to a group of non-paying clients, you’re asking him to show up. If you tell him he’s representing your organization in front of a room full of paying customers, he’ll feel pressure to perform well and deliver on the organization’s mission. That’s a good thing.

As business owners and aspiring entrepreneurs, our clients have chosen to take control of their financial destinies. In the Alliance’s student-run groups, they seek business partners, not social workers.

What you’re charging for

In this section, we’ll include quick tips for pricing the products and services student-run groups most commonly offer. The best way to find an effective pricing structure is through trial and error. If clients never hesitate to pay for your services, your prices may be too low. If your prices always prompt resistance, try lowering them. Here are some thoughts to guide your experimentation:

  • Business Training Fees – For your business training programs, try a reasonable but significant fee in the $50-200 range.

Clients who enrolled in the Intersect Fund’s first business training class paid nothing. Few graduated. The Fund raised the price to $40, which led to greater retention rates, before switching to an income-based pricing scheme; individuals who earn less than a certain amount (based on the median income determined by the United States Department of Housing and Urban Development) pay $150 for our nine-week course. Those who earn more than a certain amount pay $250. The amounts are adjusted for household size.

The Fund’s staff believes these prices are eminently reasonable. Their clients seem to agree: almost all eagerly pay the tuition; those that decline to enroll based on the tuition tend to cite their own financial troubles, not the price, as the reason. The Fund occasionally lets clients enroll at a free or reduced rate, but these clients often fail to complete the course.
  • Loan Application Fees – This is kind of a tough one. One could argue microenterprise groups exist to provide an affordable alternative to the payday lenders who commonly prey on low-income individuals. This is true, and it may prompt groups to charge a small fee, if any. One might also note, though, that these groups’ purpose is partly to prepare clients for the mainstream financial system, with its stringent rules and myriad fees.

The best solution is in the middle. Charge clients something, but not something exorbitant. Pricing gets a little sticky when it comes to lending: clients who assent easily to the prices student groups charge may do so only because they are accustomed to usurious fees other lenders charge. They may lack the experience to gauge what constitutes a fair price.

Do some research about how much clients generally expect to pay for loan applications, and try to base your price – percentage-wise – toward the lower end.

Loan Interest

Another difficult area. Student groups that charge rates even remotely approaching those of payday lenders are exploiting their clients and possibly breaking the law. Groups whose rates resemble those of a large, secured bank loan (a fixed-rate mortgage, for instance) fail to sufficiently mitigate the risk their lending incurs.

As you know or will soon learn, a loan’s interest rate reflects its riskiness. The less confident a lender is in her borrower’s ability to repay, the more she’ll fear losing her principal. So she charges a higher interest rate in an effort to recoup more money sooner, thereby reducing the amount of money a default would cost her.

So, how risky are the clients who borrow from student-run microenterprise groups? It depends. They often have poor credit or no credit. They lack the assets that, for the middle class, cushion the financial blow of hardships like illness or job loss. They often earn low incomes. In the eyes of most commercial banks, they are untouchable.

The closest mainstream financial product to a microloan is a starter unsecured credit card from a bank like HSBC or Capital One (these banks are more willing to lend to folks with average credit). These cards typically carry interest rates in the 20-25% range. In contrast, most nonprofit microlenders charge from 5 to 18 percent interest.

When determining interest, remember that one size doesn’t necessarily fit all. Loans that pay for something with no resale value (insurance, business registration, cleaning supplies, etc.) should have the highest interest rates. Secured loans (those that pay for an asset with realizable value) can have lower interest rates. Loans for start-up businesses are more risky and typically have higher rates than loans for existing businesses.