Let’s face it, pricing the products or services you provide is a nightmare.
· How many of your customers out of 100 say – hey that’s too cheap, I’ll pay you much more than that!
· How often do you think that in order to respond to competition you have to lower your prices?
· How many of you don’t actually understand what the total costs of doing business are such as getting the sale, the production costs of the product or service, the costs of after sales support, recovering the total business overheads?
So how do you price what you provide?
Here are five core reference points – they’re the ‘V’s’ for the VELOCITY OF BUSINESS you want to generate.
This is what you need to charge to recover the total costs of running your business. It’s numbers based and will be a mix of:
· Fixed costs: they’re described as fixed because they don’t generally change with the volume of business you’re doing. Typically this will be your premises, your IT, your manufacturing processes and quite often your staff as well. Lower is better and outsourcing is a good way of containing these costs. Think of renting office space, using cloud computing, temporary, interim and contract staff.
· Variable costs: these change depending on how much business you are doing. This is like ‘good’ cholesterol because there’s a more direct and evidence based relationship between what you are producing and the price you charge. However, it may mean that to deliver the business you may incur additional costs for stock, labour and financing.
Message: You breakeven but you don’t get paid!
This includes all of the above but now you’re able to build in a margin above the direct costs that starts to provide a return to you. This would include the time you spend on the business, the cost of the capital you’ve invested and the business risks you have taken.
Note: It’s very unlikely that you will be able to recover a personal ‘stress premium’ so Make sure you maintain a good work/life balance and build a good support network.
Message: You breakeven and you do get paid!
This is a tricky area.
Why? Because more business is not necessarily good business!
Let’s explore this a bit more.
· If you haven’t got a good understanding of your real costs – and this is not unusual for many businesses because they worked it out ‘once’ when they started up – but haven’t made time to look at it again – then it’s very likely that you don’t have a handle on your core costs.
· The issue here is not sales volume but profitability. Are you sure that for every £1 you spend that you get £1 and a lot back to cover all the vital stuff we talked about earlier.
· Many businesses fall into the trap when pricing volume business of ignoring the fixed costs on the basis that they’re already covered by what they’re doing now so they can be ignored. But what if you don’t get the business to cover the fixed costs? Ouch!
Message: You do more business but you make less profit!
If you’re a start up business then awareness, understanding and the potential desirability of what you have to sell is going to be minimal.
So what you have to do is create demand and the good news is – assuming you have what people want – that with the advent of social media this can be probably be done in a direct low cost way (as in spending money) but not in an indirect low cost way (as in time).
Why? Because you will need to be blogging, twittering, on Linked in and Face book et al. Try and get a handle on the ‘opinion formers’ – those people who will their friends this is a ‘must have’.
Why is this important? Because the price you can charge is directly influenced by the economic model of ‘Supply and Demand’. So, the more you can create demand for what you have the higher the price you can charge if supply is in any way restricted.
Message: More demand from the same cost base means more profit.
So far, so good. I hope you have found this fairly logical. Now we are in to the realm of fairies and fantasies. Because for some stuff there doesn’t have to be any relationship between what it costs and what you charge.
Why? Because value – as opposed to cost – is a judgement buy the individual This might be to do with prestige, exclusivity, status, being in the first 100. And the good news is that these people will not be price sensitive so you can almost charge what you want – within reason.
Don’t make any assumptions about where the value in the eyes of the buyer is. You can test this in a number of ways. The orthodox model is pre-launch market research and I would mix this with a close review of who actually bought the product and why. Examine carefully what this tells us about buying motivations, perceptions of value an importantly value delivered.
Message: Value is in the eye of the buyer.