I had the pleasure of writing this article for the special edition 2011-2012 “The Thinking Bigger – Guide for Entrepreneurs” publication that was placed on the news stands in October. We understand many of our blog readers are from outside the KC area so wanted to shared it here to help anyone who may be involved with setting product and service price points.
Focus on costs and goals to develop your pricing strategy.
Pricing a product or service is a tricky thing….too low and you’re not credible, too high and you may price yourself out of the opportunity of a lifetime.
Mentors have helped me considerably over the years when it comes to setting the price list. I came from a world where prices were set by finance experts in the corporate world. Firm, fixed, margins, floor and ceilings were all words in my daily vocabulary but estimates, hours and time tracking were words rarely spoken. I knew if my small business was ever going to have a chance of making money then we would need serious help in determining profitable price points.
I surround myself with smart people who ask me hard questions and expect me to spew out ROI, profit percentages and revenue targets in the blink of an eye. My mentors have also helped me establish a pricing strategy that supports our operations model, long-term goals and competitive advantage.
Start with Your Cost
First, you need to establish your cost baseline. Too many companies focus on revenue targets without much consideration for the expenses that are associated to achieving the revenue. Just because you bring in revenue doesn’t mean you are profitable. Focusing on expenses actually impacts profitability more than revenue. Look at the must-haves that your company needs to cover: salaries, contractors, rent, utilities, office expenses…basically all those items on the liability side of the balance sheet.
Go After Goals
Second, establish the goals. What are the six, 12 and 24-month needs, wants and desires? Do you want a $400K salary a year? What about your partners, executive team, employees? What is the kind of office you want to have? What products do you want to develop? What kind of branding do you want? What are the costs you will incur to achieve these goals?
Setting your Strategy
Third, understand the difference between the baseline and the goals. What money is required to cover your must-haves and achieve your goals?
Now we get in to pricing strategy. Start with the going market rate and assume you would charge the same. Based on the revenues needed to cover your costs, how much of your product/service at the current market rate would you need to sell? For many business owners, this is where worries begin as they realize if they charge as low as their competitors, they’ll never come close to hitting their goals.
Therefore, rarely should a small business price to its competitors or market rate. You need to clearly understand your differentiators, and price according to how you are better…create a new market if you will. This focus often times, helps a company target specific industries and/or markets to sell to and in some cases actually create new products/services. Seek out clients that can appreciate your differentiator and are willing to pay accordingly. If your company can’t identify a differentiator then pricing isn’t your problem, your product or service is. There are times that pricing itself is the differentiator, however, that is the exception not the rule. When you start to get in to the “I’ll price lower than you” game, that is the time you typically finds your business in trouble.
It can be scary to ask for more money, and many business owners hate the idea of saying “no” to business of any kind. The sales conversation should e about your offer, what you can do to help the client make more money, save money and/or live a better life in someway. If you help the client see that your company is the best choice, then getting agreement on a price point is easy.
Be who you are and learn to be better,