Helping the small business owner deal with pricing.
What should I charge?
This is a question that has come up a lot recently, in various groups online and networking. It is a common question, and certainly an area a lot of small business owners struggle, especially early on in their business, and especially if it is them who is either making the product themselves, or delivering the service. We are just a little bit too close to it all, suffer from impostor syndrome, and fear rejection. I know for myself personally I have never had any confidence issues in the past when selling in other trainers, or coaches. But once I was selling myself, I did initially have some massive wobbles.
I promised quite a few people that I would tackle this topic in a blog, I wanted to be as much help as I could be through a blog, so this is a long one. I have split it into four areas though, so you can scroll past any that are not of interest. In this blog you will find:
- How to price your product or service.
- A brief introduction to business costs.
- 7 tips on when and how to increase your prices.
- 4 Simple strategies to help get past impostor syndrome.
Interestingly how you go about figuring out your prices does differ slightly depending on whether it is a product or service. Services tend to be a little harder to price as costs aren’t so clear cut, the value of somebodies’ knowledge or expertise is a little more subjective and for the coach or sole trader we can get struck down by impostor syndrome and therefore struggle with feeling confident about our worth.
Here are some business standard methods to help you get started, we have tackled product and service separately, even though some of the tips are the same for both. I hope you find them useful!
- Whatever price you settle on, you do need to be profitable. So, the starting point is knowing what your costs are. You do need to make a living after all. There are two pricing strategies you can choose from, either cost-plus pricing which is simply adding a mark-up % to costs. So, work out your direct, fixed and variable costs, add them all together and divide by the volume to give you your unit break even price. Now you need to add a margin or mark up to your break even point. Sector norms, and your own market experience should help you in determining what it should be. Key points to consider with this strategy for the small business owner:
- Make sure you factor in a cost for your time, if it is you who is making the product.
- Do your research and make sure you have sufficient market and industry knowledge early on.
- Be aware that cost plus pricing works on the assumption that you will sell all the units, so if you don’t your profit margins are reduced.
- The other pricing strategy you can use is value-based pricing. This is determined by the value your customers attach to your product. So, you really need to know your market place very well. Both what the customer will pay and what your competitors are charging. You also do still need to have a firm grip of your costs, especially if discounting or price matching strategies are common in your market place.
- What other things should you be considering? How will charging VAT have an impact on the price? If you are just starting out, and are below the VAT threshold, are you keeping a close eye on your turn over? Have you a feel for when you might have to charge VAT? Have you a strategy for introducing that, when the time comes? A 20% price increase could be very off putting for your customers, and it is also a big cost for you to suddenly start absorbing when the time comes.
- Is it possible to keep margins modest on some products, and have higher prices and greater margins on others?
- Do you need to have different prices for different areas or markets?
- Have you an online product range, if not could you introduce one?
- Nothing stays the same for long, so keep a close eye on your costs, customers, markets and competitors. Make sure your prices remain optimal.
- Pricing a service is not so straight forward, as analysing the value of your expertise and time is a little more subjective than identifying the costs of making a physical product. However, the cost-plus pricing strategy is a business standard method for calculating prices and is just as effective for a service. In fact, you have a little bit more wriggle room when pricing a service. Just make sure you have factored in all your business costs.
- Value-based pricing also works for a service, and the same principles apply, as with products, know your market, what value your customers attach to your type of service and what your competitors are charging.
- Don’t aim to compete on price. Whilst it is helpful to know what your competitors are charging, winning new customers because you are cheaper, often means they are less loyal and will move on to the next cheapest supplier in the market. Aim to compete on other factors that set you apart such as service or flexibility. You want to be developing relationships, and a reputation for providing excellent value and getting results. This is where the subjectivity comes in.
- When providing a service, you also need to decide if you are going to charge an hourly rate, a per-project rate, or try to negotiate a retainer for your services.
- This may be predetermined by your industry and the type of service pricing that predominates in your sector.
- An hourly rate tends to be the preferred method for most businesses. It is simple and straightforward, ensures you get a return on time and labour, and the rate can vary depending on the individuals experience and expertise.
- Costs of material and travel as an example can either be included or calculated and added on. This depends very much on sector norms.
- Project or a flat rate fee are common in certain sectors. They also are common in tougher economic climates. Customers are concerned with keeping costs down and may only agree to hire suppliers on a fixed, flat or project rate so that the cost risk of a project overrun is bore by you the supplier not the customer. Consider negotiating a cap on the number of hours for the project, or agree an additional fee if there is a project overrun.
- What about variable pricing? Should you charge all your customers the same amount, or different customers different rates? This is normal in a lot of sectors and is driven by the fact that projects are bespoke and can vary greatly, and there are plenty of project variables that can and are negotiated. Offering more favourable prices and terms for loyal customers who place larger volume orders is always worth considering.
- Just be aware that in general, charging different prices to different customers could create ill will. People do talk about it and they will find out. You don’t want to compromise your integrity and lose your customers respect.
- Have a variable pricing policy, be open and transparent about it.
- As with products, nothing stays the same for long, so monitor costs, customers, competitors and markets. Keep testing prices and service offers, try new combinations and listen to what your customers tell you they need.
A brief introduction to business costs
Many of you will be familiar with these, however for some, especially early on getting your head around these can be a struggle. Therefore I thought it would be helpful to include the basics here, so that if you haven’t already, you can start to do a simple analysis of your costs, as without knowing these your pricing will always be a bit of a wing and a prayer.
Don’t change over the short term regardless of sales volumes. Examples – Tax, Rent, Salaries, Utilities. If your fixed costs are consistently high then your revenue needs to be as well.
A cost that goes up and down in relation to output. Examples – Materials, production costs, any expenses incurred to deliver a contract. Understanding your variable costs and how they behave will help keep your business profitable.
SG&A Cost Selling, general and administrative costs
Example all direct and indirect selling activity such as networking & travel. Accounting and legal expenses. Cost of a VA. Anything not included in cost of goods sold. Keep a tight control of these as they will increase your break-even point.
Cost of Sale
The direct costs attributable to the production of goods or supply of service. Also, a variable cost. Getting it right ensures you get your pricing at a suitable level to provide appropriate gross sale and margins.
If you don’t know what any of the above are yet you need to go and work it out. Start keeping a simple record now. Estimate for now those you don’t know and amend as you become aware of what the actual is.
Seven tips on when and how to increase your prices
Often when working with my clients on a one to one, pricing, and specifically price increases is the first thing we tackle. There are many and varied reasons why the micro or sole business owner hasn’t quite got the price of their product or service right in the first instance. Earlier in this blog we tackle how to price your product or service. Here we give you seven tips to help you introduce price increases and keep your customers happy.
- It is important to be frequently testing prices and offers to help understand the market place and know when you can sell more of your service or product at a better price.
- Raise the price and offer additional, unique bonus or service when quoting to a new customer then measure the outcomes.
- If your customers keep telling you you’re a bargain, or you are such great value, then perhaps your prices are too low.
- Consider increasing your prices when your competitors do, their price increase is an indicator that the market will support a price increase for your service.
- Try to be gentle and moderate we tend not to notice or feel affected by price increases if the jump isn’t too great or across all services.
- I hear a lot of advice shared about knowing your worth and the value you bring to your customer base. I wholeheartedly agree with this, however every market place has a price point, and something is only worth what somebody is prepared to pay for it, so the cautionary caveat to this is beware pricing too high and selling yourself out!!
- Don’t go to mad with large multiple price increases, especially in a tough economy. Aim to raise prices in two or three increments over a year as an example.
Keep your finger on the pulse of what is going on in your sector. Keep a close eye on what is going on with costs and prices. We all have to increase our prices from time to time, as we need to remain profitable, but equally we do need to be competitive as well.
Four simple strategies to help get past impostor syndrome
As self-employed or micro business owners one of the reasons we can struggle with making sure our product or service is profitably priced, is that we are just to close to it. Inevitably we are personally entwined with our business, and often it is us who either makes the product or delivers the service we want people to buy. It’s our creation, our baby, so any rejection or criticism can hurt a lot! It often doesn’t take much for impostor syndrome to leap out and smother us in crippling self-doubt: ‘I’m just not good enough, why would anybody use me or buy my stuff?’ A few ‘no’s, somebody arriving on the scene offering something similar, cheaper, and BOOM!!!
We will naturally move away from anything that makes us feel uncomfortable, so we procrastinate and get busy with any task that is not related to the one that makes us feel bad, even the washing up!
All these things can bubble away underneath the surface and end up manifesting themselves as fear: fear of rejection, failure, not being liked, looking or feeling stupid, offending, appearing unprofessional. Interestingly, our fears are almost always intrinsically connected to our perception of what other people might think.
Here are four simply strategies for you to use when impostor syndrome sneaks up on you:
- Try to look at what you do in the third person, get a bit of distance between you and the product or service, so it feels less personal. Use facts to evaluate what you do for your customers rather than emotion.
- Get feedback from trusted connections. Friends, family, your business tribe. Get written reviews and testimonials. There is nothing like reading positive reviews from your customers to give your self-belief a big boost.
- We are not right for everybody, and everybody is not right for us. You couldn’t possibly serve everybody anyway. So BE OK WITH NO.
- To stop feeling like an impostor we need to stop thinking like one. Rewrite your internal script. Whatever we do our product or service will solve a problem for somebody and make a difference to their lives. Every morning visualise who you will successfully help today and how.