When it comes to pricing we want you to first 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 for Pricing
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
- Marketing & advertising
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 about specific costings, margins or profit calculations please get in touch Contact us