Danger, Danger! (Imagine red flashing lights.)
That’s what goes through my head every time I meet a business owner who has mispriced their products or services.
Underpricing will slowly put you out of business, and you might not even realize the problem. Overpricing will leave you with unhappy customers. Many small business owners are guilty of emotional pricing. Emotional pricing can take many forms:
- I want to help people, so I need to make sure they can all afford my services.
- The competition is charging $$$ so I’m going to charge less.
- I feel like I’m worth $$$ so that’s where I’m setting my prices.
- I just can’t imagine asking people for $$$!
Any pricing that is not based on numbers or data is emotional pricing and can leave you subject to problems. So rather than go down that dangerous path, follow these 4 steps to ensure that your prices are set to be profitable.
Determine your costs. Here are some common costs to consider- Cost of materials- If you are making soap, how much do all of your materials cost in order to produce one bar?
- Cost of goods- If you are reselling products, how much do they cost you to purchase?
- Cost of shipping/delivery- How will you get your products to your clients and what will that cost you?
- Cost of fulfillment- How much will you have to pay someone to do the service you sold? Hint: Don’t count yourself as free labor. That is a major cause for underpricing. You have to pay yourself to perform the labor, because when you grow, you need that padding in the pricing structure in order to be able to pay someone else to perform the service.
- Sales Commission- If someone is selling the service for you, they will need to be paid. Figure this number in now, even if you don’t have a sales person yet.
- Client Acquisition Cost- How much does it cost you to get a new sale?
- How about non-business costs? For example, time away from home, hiring a babysitter, professional wardrobe etc. These can’t factor directly into the equation, and you can’t deduct them from the business as tax write offs, but they should factor into how much money you are looking to make. It’s got to make sense and you need to feel like the work you do is worth the reward it brings.
- Get your costs as low as possible. Look for other vendors that can provide what you need, keep quality high, but beat the pricing of your current suppliers. Find ways to create high value for your clients at low cost to your company. Can you create information products that add to the value of your product or service, but create very little cost to distribute?
- Do market analysis. What are similar products or services selling for in your area? Find the low, the high and the average price point.
- Find the differentiators. What is the high-priced service person providing that enables them to charge higher rates? Are they offering a higher service? Working with a more affluent clientele? Providing bonuses to their clients? Have a well known and respected brand? You need to understand what is allowing others to price themselves so you can get information on how to differentiate yourself when you release your prices.
- Determine your positioning point. You can choose to shoot for high-end, middle of the pack or least expensive. In my opinion, going for least expensive is the most challenging. You attract the clients that want everything, but want to get it for nothing. They are hard to please. They are also disloyal clients because they are always willing to jump ship when a better offer comes along.
- Set your price based on expenses, what the market will support, and ensure that you have a profit margin built in!
I sincerely hope that you are committed to making your business profitable. Revisit your pricing at least once a year to make sure your prices are on point. If you haven’t looked at your prices in a couple of years, guess what? Your profit margin has probably decreased. And it is probably time to raise those prices! If for some reason, you run the numbers and realize that you can’t be profitable with your current business, make a change! Do it now rather than pouring a few years into something that was going to slowly eat away your money! Find ways to adjust your products or offerings to something that CAN be profitable and produce great returns for your company.