As a business owner there are certain things you need to know about price and pricing products and services you sell to make your business more profitable and have an increased cashflow according to Melbourne Business Coach David Guest.
Let’s start with Price.
Price versus Value
One thing you may not know about David Guest is that he encourages the business owners he works with to forget all about competing on price. When you compete on price the only direction you can ever take your business is down! There are obviously some glaringly obvious examples of very large businesses that are successful and have based their entire business model on being the cheapest; as an entrepreneur and business owner unless you’ve already experienced this cutthroat world and survived, your best chance of success is to steer clear of it.
So, you may be wondering “if I’m not appealing to customers based on price, what then?”.
You want to be focused on Value; the value that what you sell brings into the lives of your customers. In this sense you can think of value as being a blend of the experience the customer has as a consequence of their purchase combined with their emotional response. The idea of Value applies to anyone in any sort of business. Even as an author of romance novels, you want to be focused on providing the experience people who buy romance novels expect to get when they buy and read your book (from the cover artwork, to the texture of the pages, to the plot and character descriptions, to your publicity – all of it needs to convey the same message and be squarely focused on the value the buyer is getting when they buy and read the book).
Now that you understand the importance of price versus value, let’s take a look at Price in terms of making money.
The Selling Price
Business coaches, often asked “how much should I charge of this or that product or service?”. The answer to this question lies in your business numbers and in marketplace demand.
To begin, you need to be familiar with your business numbers; in particular you need to know how much it costs to run your business (including wages, superannuation, utility costs, marketing, everything). This number is the amount of money you must generate just to keep your business running, and when you make more than this amount, hopefully you’ve got a profit.
They say in sales, that it’s easier to sell fewer things that are more expensive than lots and lots of things that are cheap. So if you’ve got some negative emotions around the whole process of selling and sales, then you’re best first step is to consider being a business with higher prices than others in the market. That way you’ll need to sell fewer whatever’s to make the income you need to stay in business and make a profit.
Now this is where marketplace demand comes in.
Research Pricing based on the Market
Think about real estate and the housing market for a moment. If you’ve ever watched any renovation programs on TV, chances are you’ll have encountered the term ‘ceiling price’. The ceiling price is the highest price that anyone has ever been prepared to pay in a particular street, suburb or city for a property. If you want to break the ceiling price for your property, the experts will all tell you the same thing – you have to go way above and beyond in your renovation and extension without over capitalizing. It’s a risk that some times doesn’t pay off.
Most markets have some form of ceiling price and the risk is all yours if you want to go beyond it. So when determining your price the first thing you want to know is what is the top price and what is the bottom price in your market.
The way to go about find out is to either go into your competitors businesses and allow them to go through their sales process with you or do a bit of online snooping.
By experiencing a rival’s sales process you will discover what price they retail at and if there’s any discounting they will do. You’ll also find out what additional value they bundle with what they’re selling to sweeten the deal. When you’re investigating price in this way you can also make your own value judgment about what customers get at a particular price point with the additional things that are bundled in.
If the idea of this in-person assessment of the competition isn’t your style, then hop onto Google and search out the information you need – price, delivery options, accessories or bundles and any other type of value add they’re using to help make the sale.
Keep track of what you discover in a notebook or spreadsheet so that you can do some reviewing of the prices later. Once you’ve done as much research as you’re happy with, pull out the various prices being charged for the same things by each of your competitors – identify the cheapest and the most expensive to give you a price range.
Knowing the price range you can safely come back to your business numbers and work out what your price could be.
Calculating Your Costs to Get a Price
Here’s one way to work out how you can calculate the price of something you sell if you have one and only one thing you sell (This is a very basic calculation and if you really want to get into understanding your numbers then it’s best to get yourself a book on understanding business numbers or find a business coach that you like and who can guide you through the mine field of business finances).
First work out approximately how much per day it costs for you to be in business; and estimate a realistic number of sales that you can actually make per work day. Now divide the number of sales per day by the costs to stay in business and add the cost of your product or service to this amount to determine the price you need to sell at to keep yourself in business.
Here’s an example. Let’s say it costs you $780/per day to be in business and you’re new to selling so will possibly be able to make 3 sales a week, which is 0.6 sales per day and my widget costs $7.50 (including manufacture, packaging, taxes, delivery, warehousing etc). I need $1300 to cover the cost of being in business and $7.50 to cover the cost of my widget. With these numbers I’d need to price my widget to sell for $1307.50 each just to stay in business; if I want to make a profit I need to add more to this total (you may also want to have an additional amount to cover the risk of not being able to sell all the widgets you’ve got in stock or some being returned or damaged).
Now compare the figure you calculated to the price range you discovered similar types of products or services being sold for.
If your number is within the price range then you’re definitely in the right place with the right product or service and now it’s just a matter of getting your ‘deal’ right in terms of value for customers at a price that keeps you in business and gives you a profit.
If you’re at the bottom end of the price range then, the world’s your oyster! You can build in plenty of profit margin and get cracking at world domination.
If you calculated a number that is higher by a few dollars than the top of the price range, you are going to need to get innovative, because you’ll need to embark on a campaign to break the ceiling price, which as you know can be a bit risky. However, you’re still in with potential and knowing that you’re about to take on a challenge will help you persevere and get there in the long run.
The real problem is when you’ve got a number that is way outside the top of the price range for the established market. When this happens, you are in serious jeopardy of business failure.
Improving Your Numbers
The quick things you can do to turn your business prospects around are to –
- Make more sales
- Reduce the costs of running your business
- Reduce the costs of your widget
If any of these is going to be a challenge for you, then either get out from this particular business as soon as you can, or get yourself a business coach, like David Guest in Melbourne who can help you make the changes it will take to turn your business around fast.
Pricing isn’t just about how much You think somebody is prepared to pay for what you’re selling. It’s about meeting the market, adding value and calculating the numbers so that you can put together the best possible deal that makes selling easy and gives you a profit.