Pricing – Getting it right, first time.

When it comes to pricing we want you to first to go back to blog post one in this series regarding value. That blog post started with the line – ‘price is what you pay and value is what you get’. Before you even consider doing a pricing list, structure, or model, you must first determine the value which is how you meet the needs of your client.

Before we continue, this is not a magical formula. We will not ever say “do this and you will make money” It is so much more complex than that. What we will say is when a lot of business owners start out they immediately look at competitors in the market and assume they need to go it cheaper to win business. It is a quick way to put pressure on yourself and usually results in having to restructure pricing further down the line, or worse, simply not making enough profit for the business to survive.

The Basic Formula

Now that is out of the way! The basic formula for pricing is this.

First, calculate your break-even cost. This is the base number that you have to achieve. When calculating this cost you need to consider:

  • Cost of the product
  • Cost of delivery/distribution
  • Premises or storage costs
  • Systems, CRM or equipment
  • Insurance, website and membership costs
  • Utilities
  • Marketing & advertising
  • Payroll

There will be others depending on your business.

Once you have calculated your break-even cost, the next step is to add on a margin of profit or increase that reflects the value you offer. Remember this includes things like the quality of your service or product, your knowledge, the lead time, the accessibility, the range, the choice. There are so many things that can influence the value that need to be considered in the price.

You Are Not For Everyone

One obstacle that you have to overcome, and this is more of a mental obstacle, is that all clients and customers are different. Some will see your price and appreciate the value. Some won’t. The key is knowing that this is ok. It is ok that some people might look at your offering and not appreciate the value. You need to concentrate your energy on the people that do appreciate the value and are prepared to pay the price.

If you have other questions around specific costings, margins or profit calculations then book a call with our small business expert Billy Darroch. You can book for free here

Value – Why It Should Come First

Price is what you pay and value is what you receive.

Defining the value that you are providing should come before defining the price and that’s because it can be influenced by lots and lots of things, including, but not limited to:

  • Quality
  • Speed
  • Experience
  • Range
  • Choice
  • Control
  • Availability
  • Uniqueness
  • Level of service
  • Accessibility
  • After-sales services
  • Efficiency

The principle of the ‘value first’ model is concentrating on how and with what you meet your customers needs. Once you define this and become competent at explaining it you will attract the customers that appreciate the value of what you are offering. A good example of this is the women’s driving instructor we worked with recently. She specialises in dealing with vulnerable people and she will be valued by pupils who lack confidence or who have had negative social situations than by confident young drivers. Her value is defined by what she offers in terms of experience and approach rather than the price she charges.

Another good example of this is the designer we worked with who was able to justify an increase in his price because he stopped talking about price per drawing and concentrated on the fact that his turn-around of the drawings reduced from 5 days to 48 hours – because he outsourced them. He massively increased the speed and quality of his service and that increased the value to his clients who needed a much quicker turnaround.

If you start with pricing or prioritise it above the value you are providing, you can forever be justifying your numbers to people who you may not want to work with anyway. Those people are always chasing numbers.

If you define the value that you provide and combine it with conscious pricing. it is the best way to place your product or service on the market. One of the biggest obstacles to overcome as a business owner when it comes to value, is allowing those who don’t see your value to move on and find someone else.

So before you do anything else, sit down and have a good think about the value in what you do.

Here is a link to further reading about value

Our next blog to fix a business headache is PRICING! You can follow us or search #KDVGoals to see the full series of 12.