| by Elena Fawkner It goes without saying that the bottom line of any successful business is
profit. Don't make a profit and you won't be in business for very long. Making a profit is
pretty simple really. You just have to make more than you spend. The trick is to know how
much you have to make to exceed what you spend. And you spend more than money when running
a business. You spend something infinitely more valuable. Time. And, as we all know, time
is money.
To maximize profits, accurate pricing is absolutely
critical. Your prices must be high enough to cover costs and enable you to earn a
reasonable return but low enough to remain attractive to prospective clients.
New entrepreneurs often have difficulty accurately pricing
the value of their time and expertise. Some take the approach that they can work cheaply
because they are fast and they're prepared to take any work, now matter how low-paying, to
fill in the time between more lucrative assignments. For this group, the mindset appears
to be that any work is better than no work. Although this may seem reasonable when you're
first starting out and you just want to make your mark as early as possible, the downside
is that this short- sighted approach can create in customers a "cheap" mindset
that is difficult to shift once the business becomes established.
Another group of entrepreneurs, though, takes the approach
from the outset that they are worth top dollar and demand fair pricing for the value they
provide and won't accept anything less. This group appears to be more successful than the
former in the longer run. Sure, they may find it slow to start with. After all, they are
new in town, they can't rely on repeat business and they can't ride the wave of their own
impressive reputations. But by setting the bar high to start with, when their businesses
DO become established, they've set the tone and their businesses usually have a firmer
foundation for it.
This article looks at the fundamentals of pricing for the
new home-based business entrepreneur.
Basic Principles of Pricing
Here are some basic principles to keep in mind when
considering your pricing strategies:
Prices must at least cover costs. If you don't at least
cover costs, and this includes an amount for your time, you will incur a loss. If your
business is incurring a loss it's a hobby.
The best way to lower price is to lower costs As price
equals costs plus profit margin, it's obviously better to reduce the cost element than the
profit element if, for any reason, you find that you must reduce your prices.
Prices must reflect the environment in which they operate
Any price, whether yours or your competitors', necessarily reflects the dynamics of cost,
demand, market changes, competition, product utility, product longevity, maintenance and
end use.
Prices must be within the range of what customers are
prepared to pay It's all very well having the best bread slicer in the western world but
if your price is more than customers are prepared to pay for it, so what? On the other
hand, there is absolutely no reason to charge less than customers are prepared to pay
either.
Prices should be set at levels that will shift products and
services and not to beat competitors alone It's easy when you start delving into all of
the sophisticated analysis and research around about optimum pricing levels to forget
that, at the end of the day, you set your prices as high as you can while still shifting
your products and services. So don't think that keeping pace with competitors is enough.
It isn't. You may have competitive advantages that mean you can price higher than your
competitor and still charge more.
The price you set should represent a fair return for your
time, talent, risk and investment Don't be coy about demanding a reward for what you bring
to the table. Your expertise and talent has objective worth. Don't just give it away.
Charge for it.
Price = Cost + Profit Margin
The basic price you will strike is simply your costs plus a
profit margin. It follows that before you can set your prices you must know exactly what
your costs are. Costs fall into three main areas:
Direct Costs Direct costs are those things directly related
to the creation of your product such as raw materials, parts and supplies.
Overheads Overheads are business costs not directly related
to production and include things such as taxes, rent, office supplies and equipment,
business related travel, insurance, permits, repair of equipment, utilities (electricity
and telephone) and professional advice (accountant, lawyer).
Labor Labor costs include all wages paid to employees
*including yourself*. It's amazing how many home-business owners forget to include their
time as a cost of business! Calculate your labor costs by multiplying the number of hours
worked by an hourly wage. You should also include fringe benefits (typically 15% plus).
Once you have ascertained your total costs, add a profit
margin. A 15-20% profit margin is standard for most home-based businesses. Although you
have included your own wages in your labor costs, if you don't add a profit margin there
will be no money for growth or expansion of the business. |
