It is always tough to decide what price you should charge for your product or service, but it is also one of the most important decisions you’ll make as an entrepreneur. Whether you are starting your business or are presently in business, pricing your products properly will set you on the road to success.
For example, I was dealing with a client last week who complained about not making enough money. He was a service provider – a landscaper – inundated with contracts but after being in business for 3 years he didn’t have money in the bank.
I sat down with him and asked him if he had a budget. As I suspected, he didn’t have one; because he really believed that he didn’t need one. So I continued to ask him questions like – “So what are your new customer targets for this year?” “How much revenue do you want to make?” “How much income or profit were you hoping to make?” He didn’t have any answers.
Business is all numbers and a lot of business owners “hate” numbers. Why? They don’t understand the basics. They talk margins without understanding what it is. Many people confuse profit with revenue. We needed to better understand his business before we could help him.
Here are the steps we followed to figure out how his business could end up with money in the bank:
1) To determine how his business was making its revenues – In the landscaping business, we determined his various revenue streams included: lawn care, seasonal jobs, small landscaping projects, large landscaping projects and snow removal in the winter.
We then projected the number of these jobs he was expecting to complete per season and the price that he usually charged for those jobs.
By figuring out how many jobs he was expecting to complete and the amount of money he was getting for those jobs we determined his revenue projections for the following year.
The next step was to determine:
2) His Cost of Goods Sold including the cost of his materials to complete his jobs.
3) His Cost of Labor including the cost of paying himself and
4) His other expenses including truck maintenance, gas expenses, cell phone charges, bookkeeping services, supplies, utilities, advertising, and promotion.
By doing this exercise, the landscaper discovered that he was just breaking even. He was charging enough to cover his materials and enough to cover his labor and other expenses but unfortunately, he forgot one thing – that is setting another percentage aside for making a profit.
IN BUSINESS THERE ARE TWO WAYS TO INCREASE YOUR PROFIT.
- You either have to get out into the business place and hustle for more contracts or
- You have to charge higher prices for the work you are performing.
In this instance, it was quite an easy solution for him as he was already swamped with work. He didn’t need more business; he just needed to make more money. So, in the end, we decided that he had to charge more for what he was doing.
Determining the costs for every service you provide as well as adding additional monies for profit is essential when you are quoting; however, it should not be the only driving force when determining how to set your prices. Customer perception is a huge factor. If your customer thinks that you offer a great product or service; or if you offer them a better service than your competitors and your customers like you, then you will be able to charge more for your service.
Although we have been taught from our economic classes that price increases tend to cause decreases in demand for what we are selling, we are now learning that price increases can create a higher demand. In the case of some goods like cars, if prices were the determining factor, then we would all be driving Kias.
The goal of any business is to make a profit. Believe in what you are selling. If you do this work ahead of time you will not be in that awkward position later on having to significantly increase your prices because you didn’t do it right the first time.