You know this feeling – you have been running your business for some time, it was supposed to be all fun, freedom and money, and now you are wondering – what happened to that money part? Why are you working hard, giving it your 100% (and more) yet not getting the rewards you deserve?
This is the part that most business owners miss. It is called the proper pricing strategy. Do it incorrectly, and your business will suffer if at all survive. Do it properly, and you are on to a winner!
Many new business owners decide their prices based on what I call a “finger in the air” or a “they charge that much” strategy, which can work at times, but more often than not it doesn’t! And once the prices are set, it is really difficult to raise them – after all, you already have some customers and they are used to the amazing value they are getting for a low price!
When it comes to pricing, you need to think about three different things.
Firstly, make sure you do your homework. Research is key. Know your competitors, your market, seasonality of the industry you are in, and your customers. Saying that knowledge is power is definitely true when it comes to pricing!
Secondly, make sure you are on top of your numbers. Do a proper bottom-up pricing exercise, where you take all of the direct costs incurred in the production or delivery of your product or service and add them together. On top of your direct costs, you must include a proportion of your overheads, and that needs to include your salary too – something that people often forget about!
Remember, every cost you miss here will eat into your margin – it makes sense to do it diligently and protect your hard-earned profit, doesn’t it? Consider adding a contingency to your final price, before you add on a profit margin. Why? For the unexpected. Think about who bears the risk if something goes wrong?
If you do this second step correctly, you will be able to set up a starting point to your price.
Lastly, the most important point. What is your product or service worth to your customers? How much pain does it sort out for them? This tends to be the point where most business owners fail. They think about how much it is worth to them, personally! Big mistake! You look at the labour of your hard work through a prism of your self-worth, your money blocks and your own money beliefs. Your customers will have a different view!
Incorrect pricing will eat up your profits, create cash flow issues and can kill any business, no matter the size. Does it affect you as well? Can you afford not to have a proper pricing strategy in place?