How do I improve my pricing? (Finance Part 5/5)
by Peter Searle Sep 04 2018
When business owners of SME’s are asked what makes them different, they nearly always refer to the quality of their service, or product, compared to their competitors or larger organisations. Clearly, if they are doing what they say, then they have an “edge” and should be able to charge more than a larger organisation. But in a follow up question, they often then admit to trying to compete with larger organisations on price, otherwise they will not get any sales.
Both reasons seem to stand up when taken in isolation, but when looked at together it is madness. If you are offering something which is better, then you should be able to command a better price.
Lowest price to secure work is a recipe for disaster, and many small businesses owners are not making much money, the owners would be better off getting a job and working for someone else. So how can you improve your pricing?
There are essentially three things which need to be looked at.
- What is your “edge” and how much is that worth?
- Am I making a profit if I sell at the proposed price?
- How do I maximise my profit?
What is your “edge” and how much is that worth?
Finding a pricing point in the market is about knowing what your “edge” and being able to articulate that to any potential buyer. Buyers must be prepared to pay for that “edge”, the number of customers who are prepared to pay for it, is the size of your market. In the early days of a business, until it has a reputation, the “edge” may not be defined exactly, but after 18 months of trading your “edge” should be clearly defined, your prices reflect it and the size of market be known. Your “edge” should evolve to become a brand which the staff, customers and suppliers can all identify with. A strong brand can command a higher price, think of the pricing of Apple products.
Am I making a profit if I sell at the proposed price?
Having done the research and decided what the market will bear in terms of price, you then need to see if you can produce at a profit. Pricing can be broken down into three key parts. Firstly, there is the variable cost of production of each item which is sold, be it a product or service. The next is the cost of running the business, if you sold nothing. That’s all overhead items, like fees, premises and marketing. Finally, there is the profit. When these three elements are added up you can work back to the unit selling price, be that for a product or for time. Unless the profit is a sensible level then there is no point in continuing.
To increase the profit, you have to either sell more and keep the overheads the same, or reduce the cost of production. The other alternative is to raise prices, until people will not buy. So, what is the maximum you can raise prices by?
Tracking the market.
If you never loose an order on price, you are not charging enough as you don’t know where the ceiling is on your prices or you are bidding in the wrong area of the market. To lose some orders is perfectly acceptable, but there is a cost to bidding so losing frequently, will cost you dearly in bidding costs. The loss of an order gives you important feedback on your pricing. If you have worked out your variable costs and overheads correctly and add a known percentage for profit, then you can adjust the profit percentage on the next bid to either win or lose the bid, depending upon your appetite to secure the work. With practice you should be able to determine the maximum you can charge in any situation.
Pricing is a science and an art. It is critical to the success of a business, yet many businesses pay minimal attention to it. Consider, if you sold an item for £10 and it cost £8 to make. There is a £2 profit. If you sold 100 you would make £200 on the 100 items sold. If you raised the unit price to £12, it still costs £8 to make, so the profit is £4. The same 100 items now make you £400 profit. If you had kept the price at £10, you would have to had made 200 to make £400 profit. Think how quality might have suffered with such an increase in producing so many.
In the meanwhile, if you need to reset your thoughts on raising prices, get in touch with me, for a no obligation discussion on pricing. http://ow.ly/SyPn30j0MUY