“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large. " -Henry Ford
While pricing your product or service is an important consideration, I think it receives way too much emphasis and attention. Yes, you need to price your product/services wisely… after all, you’re in business to earn profits. The problem arises when business owners hyper focus on pricing, instead of value.
Below are some general tips on pricing… However, it’s important that you note the following:
1. I am hesitant to recommend universal pricing strategies for all products and services because critical variables differ significantly by industry, geography, personal goals, size, location, and many other reasons. But since you understand your resources, costs, forecasts, and goals better than anyone, you’ll have to fill in the blanks.
2. I am not an expert in business (or personal) finance. This website is devoted to helping you become an excellent marketer. So, while it’s appropriate that I cover pricing and financial planning as part of the marketing process it would be irresponsible to delve much further.
√ Make sure you consult with an objective financial advisor… one that specializes in small business investment capital, cash flow management, and the like. Many, many small businesses go under due to lack of proper funding. Make sure you have enough money, particularly in the first couple of years, to weather unexpected storms.
√ Arrive at ballpark pricing by assigning costs by product. You can start with your costs and work up or begin with a proposed price and work back. Here’s an illustration how of this works:
Let’s assume I am (once again) a widget retailer and the following is true…
Money I receive when I sell one widget $10.00
* Less labor and materials (costs to produce one widget) or my cost of goods sold (COGS)
* Labor (yours or anyone else’s) - 2.00
* Materials - 1.00
Gross Profit (amount of money I’m left) $7.00
This means my gross profit margin is 70%
* Less Administrative Costs (rent, utilities, office supplies,
furniture, mgmt. salaries, etc. ) - .80
* Less Marketing (signage, advertising, on-hold music,
business cards, specialty ad items, etc. ) - 1.20
Net Margin (before taxes) $5.00 50%
How do you assign administrative and marketing costs by product? Simply divide the total amount you’ve spent in each category over a specific period of time. Then figure out what percentage of your total budget (for the same period of time) they represent. Deduct that percentage amount off your sales price.
For example, let’s say I sold $500,000 worth of products last year. Of that, my $10-widget accounted for 50% of the sales, or $250,000. My total administrative and marketing outlays only were $100,000.
Since my $10-widget was 50% of my business I’ll assign that product the same percentage of costs, or $50,000… $20,000 for administrative expenses and $30,000 on marketing. Based on earning of $250,000 I should deduct $20,000 or 8% for administrative costs, and $30,000 or 12% for marketing expenses - $.80 and $1.20 respectively.
Please do not assume that any of these are standard percentages… they vary widely. If your company is new you’ll obviously have to use your forecast financials.
√ Perceptual Pricing Categories… A simple way to begin pricing for start-ups, is to put your products, services or company into one of three perceptual categories.
The first is the “elite" group. These businesses are considered ‘upper crust’ (outstanding services, exceptional products, exquisite environment, and other factors) and their products or services are priced accordingly.
The second group consists of the A- to B+ companies. Their pricing is competitive with others in their industry… whether that’s ‘steep or cheap’. Most small businesses fit into this category.
The third-class of companies fit into the “plain-folk-down-home-workingman" pricing strategies group. They are symbolic of the outlet mind-set but once again, this is no reflection on their products’ value or quality.
At first glance these might appear arbitrary and silly, but place your company into one of the three categories. (Remember, while each appeal to different audiences they are equally valid and offer comparable value in the marketplace. )
Next, use the objective product pricing you’ve already established and check to make sure it’s in line with other companies in your group. If so, reduce the selected price by a small amount… $1.00 to $5.00 is usually enough.
This is a simple and brilliant way to ensure that you, your customers and your wallet are thrilled … and you’re not competing on price!
Mary Eule specializes in helping small and medium-sized businesses get and keep profitable customers. Formerly a Fortune 500 marketing executive; founder of two successful small businesses and award-winning speaker, Ms. Eule is President of Strategic Marketing Advisors, LLC. and co-author of a new book, “Mandatory Marketing: Small Business Edition".
She has a BA in Journalism/English from the University of Maryland and earned her a master’s degree in marketing from Johns Hopkins University. Log onto her website: http://www.StrategicMarketingAdvisors.com for free articles, newsletter and helpful marketing tools, tips and templates… and/or to purchase the book.