Getting the right pricing of your product or service can be the most difficult job for business owners. Occasionally, businesses vastly overestimate the true value of their products, but we find that we are more likely to see our clients underselling themselves. It may be that feeling of “imposter syndrome” that tells you your service isn’t worth that much, in which case we’d challenge you to find the evidence and see what it really tells you. We’ve brought together some factors to consider when putting a price on what you’re selling.
It’s Worth More Than the Sum of its Parts
Obviously, you need to take into account the costs of the materials you need to make your product/deliver your service, plus the person-power spent on it, plus some profit. However, that equation could be overlooking a lot of other factors you need to consider:
- Materials and labour costs (including your role as manager if you employ labour)
- The cost of marketing or selling
- Business overheads – Rates, travel, accountant’s fees, etc.
- The cost of servicing debts you may have incurred to start/run your business
- Did you invest capital in your business? Then you should factor a return on investment as well.
Understand the Hidden Costs
These can be harder to identify, and might only become apparent further down the line, at which point you might want to reconsider your prices. For example; suppose you have ten clients and you are providing the same service to them all. However, if one of them is constantly asking for additional advice, missing appointments, or changing the goalposts, it may be that the service you are providing them should cost more. In order to evaluate this, you can try:
- Keeping timesheets to track where your time (or your team’s time) is being spent
- Manage your finances carefully to see when you are going over budget on projects. Using accounting
- software like Xero, will assist you to log all your expenses to compare against your budget.
- Keep careful records of changes/additional requests, so that you can compare them against your original description of the job.
- Define boundaries clearly at contract stage, so your customer knows what to expect
- Keep track of product inventory to see what is turning over quickly, and what it is taking up space for longer and consider removing or reducing production of that item.
Know Your Market
Keep an eye on your competition and how much they are charging for a similar product or service. Evaluate what you have to offer by comparison and make sure your price reflects that. However, don’t just match prices. Your costs could be greater, making it impossible to make a decent profit. If that’s the case, ask yourself why? Can you make changes to your process? Or is your service/product superior? In which case, it should cost more.
Think in Terms of Value, Not Price
This can be a real stumbling block for many business owners, particularly those offering professional services or skill sets. You may be providing a service that only takes a short time to execute because of the many years you have spent studying, practicing and honing your skills, so remember that when you set your prices.
- Be ready to stand up for the value of what you are offering – understand it, so you can articulate it
- Set a minimum price for any job. For your own records, you can work it out as 2 hours, or 1 day minimum for small projects for instance, but try to avoid putting a time on it. Why should you earn less for being more efficient than your competition?
- Compare your service – the work you have done examining your market will help you feel confident about the value of what you are offering for your work
Once you’ve down all your homework, there are essentially two methods for pricing.
1.Cost Plus – where you include all your costs, plus some for profit and stick a price tag on it
2. Target Costing – where you research how much you can charge and work backwards to decide what you can afford to spend on each stage.
Speak to your accountant about the best method for your industry and particular circumstances. They should be able to advise you about mark-ups, margins and all sorts of other fun stuff!
Things Change – When to Change Your Prices
We wouldn’t suggest changing the price of your product every time the cost of materials go up or down a few pence, however, some changes can have a long term effect on your bottom line and should be taken into consideration. For instance, if your suppliers have increased their costs because of Brexit, that’s potentially a long term change that could make the difference between a decent profit and none at all. You’ll be amazed at how empowering it can be to understand the true value of what you produce, so don’t be fazed. And don’t forget we’re always here to offer advice and support, just give us a call or drop us an email.