The five key pricing issues for businesses
Let’s face it, pricing the products or services you offer is a nightmare.
How many of your customers out of 100 say, hey, that’s too cheap, I’ll pay you a lot more than that?
· How often do you think that in order to respond to the competition you have to lower your prices?
How many of you don’t really understand what the total costs of doing business are, like getting the sale, product or service production costs, after-sales support costs, total business overhead recovery?
So how do you price what you offer?
Here are five central reference points: they are the ‘V’ for the BUSINESS SPEED you want to generate.
This is what you should charge to recover the full costs of running your business. It is based on numbers and will be a combination of:
· Fixed costs: These are described as fixed because they generally don’t change with the volume of business you’re doing. Usually this will be your facility, your IT, your manufacturing processes, and quite often your staff as well. Less is better and outsourcing is a good way to contain these costs. Think about renting office space, using cloud computing, temporary, interim and contract staff.
· Variable costs: These changes depend on the amount of business you are doing. This is like ‘good’ cholesterol because there is a more direct, evidence-based relationship between what you are producing and the price you are charging. However, it may mean that to deliver the business you may incur additional costs for inventory, labor and financing.
Message: You’re at breakeven but you don’t get paid!
This includes all of the above, but now you can earn a margin on top of your direct costs that starts to bring you a return. This would include the time you spend in business, the cost of capital you have invested, and the business risks you have taken.
Note: It is very unlikely that you will be able to recover a personal “stress premium”, so be sure to maintain a good work-life balance and build a good support network.
Message: You break even and get paid!
This is a complicated area.
Why? Because more business is not necessarily good business!
Let’s explore this a bit more.
If you don’t have a good understanding of your actual costs, and this is not unusual for many companies because they calculated it ‘once’ when they started, but you haven’t had time to look at it again, then it’s very likely that you don’t have control over your costs. main costs.
The problem here is not the volume of sales but the profitability. Are you sure that for every £1 you spend, you get £1 and more to cover all the vital stuff we talked about earlier?
Many companies fall into the trap when they price turnover of ignoring fixed costs on the basis that they are already covered by what they are doing now, so they can be ignored. But what if you can’t get the business to cover the fixed costs? Oh!
Message: You do more business but make less profit!
If you are a start-up business, then the awareness, understanding and potential appeal of what you have to sell will be minimal.
So what you have to do is create demand and the good news is, assuming you have what people want, that with the advent of social media this can probably be done in a direct and low cost way (like spending money), but not in a low-cost, indirect way (such as over time).
Why? Because you will need to be blogging, tweeting, Linked in and Facebook et al. Try to get acquainted with the ‘opinion formers’ – those people who love their friends, this is a ‘must have’.
Why is this important? Because the price you can charge is directly influenced by the ‘Supply and Demand’ economic model. So the more you can create demand for what you have, the higher the price you can charge if supply is restricted in some way.
Message: More demand for the same cost base means more profit.
So far so good. I hope you found this quite logical. Now we are in the realm of fairies and fantasies. Because for some things there has to be no relationship between what it costs and what you charge.
Why? Because value, unlike cost, is an individual purchase judgement. This could have to do with prestige, exclusivity, status, being in the top 100. And the good news is that these people will not be price sensitive, so you can almost charge. what you want – within reason.
Don’t make assumptions about where the value is in the eyes of the buyer. You can test this in several ways. The orthodox model is pre-launch market research and I would combine this with a detailed review of who bought the product and why. Consider carefully what this tells us about purchase motivations, value perceptions and, importantly, delivered value.
Message: Value is in the eye of the buyer.