Pricing is very important. But it's also not very important. That's contradictory but let me explain.
Pricing is both a practical and psychological thing.
Practically you need to set a price to cover your own costs, your time and still factor in enough to make a profit. From your customers point of view the pricing needs to fit with in their budget. You need to offer them something that's worth more to them than the money in their pocket.
Psychologically customers don't necessarily want the cheapest provider. They want the best provider for the best price.
Most people accept that you get what you pay for and if a customer doesn't want to pay for your expertise and specialist services, then they're not your ideal customer and that's fine. Pricing is one way to secure a customer base made up entirely of your ideal customers.
Price too low and you'll only find customers who don't care as much about quality as they do about cash. (Underselling yourself isn't efficient or a long term success strategy by the way)
Price too high and potentially great customers will go else where.
You need to find the sweet spot. It's tricky and will be work in progress but there are solid foundations from which to start.
A lot of new businesses fail to properly assess their costs. Without fully understanding your costs, a lot of money can fall through the gap between income and outgoings so it’s important to understand what your true costs are.
Examples of costs: equipment, your time, travelling time, fuel, wear and tear on vehicles, marketing, communication (e.g email and phone calls), office overheads (i.e. rent, internet, phone line, computers, office furniture and stationary), insurance, professional body memberships, subscriptions and courses.
All of these things cost time, money and affect the profits you make. Write down every single cost you can possibly think of to do with your business. You might be surprised at how much there is. We’ll cover different types of cost later on in the Finance section but for now, just collect up all of the costs associated with the work you’ll be doing.
A sales margin is the difference between what it’ll cost you to do the job and what the customer is going to pay you to do it. This is a fundamental starting point and doesn’t yet cover overheads and other business expenses.
First you need to work out your costs. Let’s say you charge your time at £30 an hour and you own the three tools you need to complete the job. It costs you £5 in fuel to get to and from the job and the travel time is a 30 minute round trip with the job taking an hour. So far, your base cost is travel time + job time + fuel = £50. So you know that you need to charge £50 purely to break even. Now, nobody wants to work to break even.
Now you need to work out the value. How much is that completed job worth to the customer? Unless you’re doing very unique work, checking out your competition is a good way to find out what other businesses are charging for the type of work you do. There are plenty of reasons to charge more or less but for now, take a look at how much other local businesses are charging for each of the services you provide. If the job above is, on average, priced at £100 and you price yours the same, that £50 is gross profit.
This is one type of profit. Your net profit will be less than that, as it will include operational and overhead costs but we’ll cover that later.
Being able to offer discounts or being able to negotiate is a useful tool for closing deals so you need enough wiggle room in your profit margins to allow for this when necessary. Pricing for the lowest you can go means there’s nowhere to reduce should you be faced with a potential repeat customer who could be locked in with a discount.
This is particularly useful for commercial customers but can work on an individual basis as well.
When I first started pricing my services, I looked at the prices that my competitors were charging. This is a sensible way of getting an idea not only about your competitors, but also of the expectations of your future customers. If your prices are wildly lower than those of your competitors, not only are you leaving money on the table but people might well be put off working with you. In their minds, low price could potentially mean low quality.
Conversely, charging much higher prices needs to be completely and honestly justifiable otherwise potential customers will go elsewhere. It’s always good to strive to be better than your competitors but you need the proof to back it up.
Once you start getting enquiries then you can evolve your pricing based on the feedback. If no one is questioning your prices then it might be time to start charging more for services and if you’re getting a lot of rejected quotes, then perhaps you need to reassess how high your prices are or adjust your services to justify the price.
Listening to you customers will benefit your business no end, especially when it comes to pricing but really in all areas. Guessing what people are looking for and what they will pay can only get you so far. Customer feedback is a highly valuable tool for getting your pricing into the best possible range.
If you'd like to learn more about sales then you'll like our online training. It includes a whole module dedicated to sales. And if you're to succeed you're going to need the great sales technique.