The price isn’t always right. At Convex Accounting, we work with many clients who don’t know how much to charge. They undervalue their worth and undercharge. Or, they go too high and price themselves out of the market. We want you to set your price with greater certainty, and profit!
For many businesses, price setting is an inexact science for any number of reasons:
- They don’t know their customers
- They don’t understand the full value of their service
- They’re unaware what their competitors are doing
- They fail to factor in all their costs
- They ignore what’s happening in their industry
As a small business owner, it might seem difficult to find time to consider all of those factors. But you really need to. The right price is the foundation on which a profit is built.
Key issues to keep in mind
Know your customers
Have you ever created a customer profile? It’s time you did. You can gain a great deal of knowledge from asking your existing customers questions like these:
- Age range
- Marital status
- How did they find you? (Absolute gold for knowing where to promote yourself in the future)
- Why did they come to you instead of your competitors? (This might identify a point of difference. This can let you set a premium price because you offer a service or product your competitors don’t)
- What problem did your service or product solve? (You might be the only person who can solve this problem. Or, the relief from this problem feels so good, your client will happily pay good money for it. Again, these are cases for premium pricing)
- What part did price play in their purchasing decision?
- What price did the customer expect to pay? (How do the responses align with what you charge? If client after clients says they expected to pay more for your service or product, then maybe that’s a bit of a cue to actually charge more!
By asking these questions of your existing customers, you’ll do better business with your future ones, at the right price.
Don’t delay! Every business needs a customer profile, so create one as soon as you’ve read this post. You can easily survey your existing clients by using Mailchimp or a similar email marketing service. The more people you survey, the more reliable the information. Give your existing customers an incentive to respond, e.g. a small discount. This could set off a nice wave of business while gaining vital knowledge at the same time.
How much value are you creating?
When you provide a service or product every day, it is easy to lose sight how valuable that offering is. When you do, you set a price that does not reflect its true worth. Customers will see value in many situations. They’ll happily pay a higher rate because of that. This might include:
- Sole provider. The only internet installer in the region can charge a higher price because of sheer demand. Is your particular service unique or rare in your area?
- Addressing pain points. A massage therapist provides much-needed relief to a client who understands that feeling good is priceless. What pain points – not always literal ones! – do you address?
- Convenience. A mobile hairdresser cuts hair in the comfort of a client’s home. They charge a little more to cover the convenience they are offering. Is your business high in the convenience factor? Do you charge enough for it?
Determining the value your customers place on your service or product will help you figure out what to charge for it. This information can be gleaned from that all-important customer profile. The more unique or valued your service, the more you can charge.
Look at how you can add value to what you already offer. Ask your customers for their thoughts. The survey you use to compile your customer profile can ask existing clients what extras you should add to make your service, or product, even better.
Don’t forget to ask how much they’d be willing to pay for that extra value!
What are my competitors doing?
Busy in your own little business bubble, you might ignore what your competitors are doing. It’s time to burst out of that bubble and check them out, while asking yourself these sorts of questions:
- Is my offering different from my competition?
- Am I more reliable?
- Do I provide a higher quality service, or a superior product?
- How much do they charge?
The answer to the last question will give you an idea of how to set your own prices. If you have lots of competitors, you can’t charge too much more than they do. Unless, of course, you’re substantially different.
The answers to the other questions might help you unearth that area of difference. This can be a rich source of value if you do things better than your competitors, and charge accordingly.
Promote the heck out of your point of difference. Convince your potential customers how much better their lives will be because of it. This will allow you to set a price in line with your superior, and singular, offering.
How much is this costing me?
Your prices must cover costs, and allow enough room for you to make a living. Costs do fluctuate, and can be hard to keep track of. When you’re unsure how much everything is costing you, you’re also unsure about your pricing strategy. It’s time to revise all costs associated with your business, both direct and indirect.
A direct cost is directly linked to your product or service. For example, the cost of materials for a remodelling job. Or, the cost of shipping products to a store. These are relatively easy to keep track of, as they’re directly related to the service or product you’re providing.
On the other hand, indirect costs can be more difficult to monitor. They are the overhead costs of maintaining an entire company.
- Rent and rates on your office
- The cost of your website
- Paying off debt e.g. company vehicles
We refer to indirect costs as variable overheads. They’re used by multiple activities, so they can’t be assigned to specific cost objects. This makes things tricky when calculating your costs. We’re here to help you unravel that great mystery!
When you add direct costs and indirect costs, and divide per sale, you end up with your break-even point. This is minimum amount of money you need per unit sold, or service provided to break even. On top of that, you must add a reasonable mark-up so you make a profit. If the costs seem too high, and force up the asking price to unacceptable levels, explore how to trim them. If it all seems too hard, chat to Convex Accounting.
Don’t forget to factor in your own wages! Many business owners pay themselves a very small wage, or even nothing, because margins are tight. Make sure your pricing allows you to take home a reasonable pay cheque.
Know your market and forecast!
We’ve talked about customer profiles, but equally important is understanding the industry you work in. Things might be going well now, but will that continue? Knowing what the future holds can affect how you set prices.
For example, if resources become scarce within the next five years, prices will rise due to supply and demand. Costs of production will increase and your prices must absorb that increase. Meanwhile, people in seasonal businesses, like horticulture and tourism, are used to tracking yearly variations in their industries. Are you tracking yours?
We’ve talked about direct and indirect costs, but there is a third type of costing to consider: forecasting. Equipment needs to be replaced, or business growth leads to expansion. Forecasting means being aware of such things, and taking action to plan for them now.
Clearly, we can’t anticipate all future costs. But it helps to calculate what costs you CAN plan for. New technology is an obvious example. You might add a mark up to each unit to prepare for these future expenses.
It’s also helpful to remember that not every product you produce will be sold. This is where allowing for a margin of error is very useful. Ask yourself “can I still meet my costs if I sell less than I expected?”
If you’re struggling to forecast your costs, and set your prices as a result, why not sit down with a friendly member of our team? We understand it’s not always easy to set a price strategy. We also appreciate the importance of getting it right. We’re happy to provide advice on how to plan, and price, for the future!