Business Development: Is Your Price Right?

In this article, I will discuss the thorny subject of pricing for service businesses, why most businesses underprice and a 5-step formula for calculating your price.

Chris Cardell, the marketing guru, is firmly of the opinion that most small businesses underprice their products and services because they fail to properly articulate the value that they are offering.

In many cases, just by increasing prices,  small business owners can alter the fortunes of their business.

Is your price too low? If so, what’s stopping you increasing your price?

The problem could be faulty thinking.  For example;

• you may mistakenly be thinking that price is the most important factor in your customers buying decision.  However, examine your own buying decisions and you will quickly find that you often pay more for services that are better, faster or simply nicer, or perceived as being so because the vendor articulated the full value of what they were selling.
• you believe the customer when the say that they can get a better deal elsewhere.  Again you have to restate your value and why the customer should pay more.
• Lack of confidence in what you have to offer – a mistake made by many start-up businesses that have yet to be established.
• Lower prices mean more sales.  Failure to understand the dramatic impact that discounting your price will have on your profitability, is a major cause of business failure.  Go to my ‘Using Bookkeeping Data‘ page and download the ‘Pricing Decisions’ chart that illustrates this point.
• You need to offer a discount for a large order.  When what you are selling is your time, you cannot make more time simply because it is a big order i.e. there are no economies of scale.
• Dropping your price because you think your customer cannot afford it.  Remember, people will not value what you offer if they can get it at a discount or free.  If they pay full price it demonstrates that they will be committed to working with you to get a return on their investment.
• Forgetting that, by taking on under-priced or discounted work, you are reducing the time available for producing quality work for fully priced jobs.

If you are going to make your higher prices stick then the first person you need to convince is yourself.  You need tp present your price with confidence.  How do you do that?

The following 5-step formula will help you to calculate what you should be charging:

1. Re-orientate yourself – ask yourself what you would expect to be paid if you were in paid employment or what you would pay for someone with your skills.  Remember that employees get lots of benefits including holidays and sick days.  Let’s assume you would be paid £75,000 p.a.
2. Forecast the number of billable days you will have available each month bearing in mind preparation, research. marketing and administration activities required to run a business. For consultants and trainers, you will be hard-pressed to deliver more than 8-10 days per month of quality service.  Assuming you only have 100 billable days a year, your daily rate is £750. (But we are not finished yet!)
3. You now need to calculate the costs of running your business i.e. list your annual overheads including, admin, travel, marketing, equipment depreciation, office rent (even if you are working from home) and so on.
4. Divide your overhead costs by the number of billable days you expect to sell.  Assuming overhead costs of £50,000 per annum and 100 billable days, this would be £500 per day.  Add this to the £750 above and your daily rate rises to £1,250. (But we are still not finished!)
5. Now you need to add a profit margin  – this is your reward for taking the risk of running a business. Assuming your profit margin is 20%, this adds £250 to your daily rate, increasing it to £1,500 per day.

If you apply this formula, it ensures that you receive a proper rate of pay, your business expenses are covered and you receive a profit margin for re-investment in growing the business.

Write this down to remind you how you calculated your price.  When you are challenged on price, you might need to remind yourself that you cannot possibly cut your price if you want to achieve your required rate of return.

If you are still not convinced, look again at the ‘Pricing Decisions’ chart on my ‘Using Bookkeeping Data‘ page – if you understand this chart it will make you think twice about discounting your price!

Let me ask you again.  Is your price right?

If you would like me to help you with your web marketing then take a look at Web Marketing Machines.

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Tagged as: business development, Business Strategy, how do I increase my price, how to start a business, price discounting, pricing consultants, pricing services, setting up a business, starting a new business, starting your own business