One thing that often happens with entrepreneurs and small business people is that they charge too little for what they are selling. This is especially true for entrepreneur some small business people that provide services. As an entrepreneur or small business person, you need to consider many factors when setting your prices. How much is it going to cost you to provide your product or service? What could you make elsewhere? What are others charging for similar products and services?
As an entrepreneur, you must be careful not to undervalue what you offer by assuming people won’t pay for it. Let’s look at some of the things that should be considered when setting your price.
How much is it going to cost you to provide your product or service?
Deciding what you’re going to charge someone should always start with what it costs you to provide the product or service. However, many service businesses skip this step because they think “I’m not really paying for materials so I don’t have to account for that kind of cost.” But you do have to account for them. How to determine how much it costs you to deliver the service can seem like a daunting task. Here a few questions to ask yourself to determine this cost.
- How much does it cost you to run your business?
- How much do your business cards cost?
- How much do you pay for your telephone for your internet service?
- How much do you pay for networking?
- How much do you pay for computers, cell phones, etc?
Delivering the services you offer does come with some expense before the first sale. Make sure you are including that expense in your analysis of what to charge for your product or service, so you are passing along that cost to your customer.
What could you make elsewhere?
You could always get a job somewhere else doing what you do working for yourself. Look at what the going rate for that job is in your area. Break it down into an hourly rate for yourself. This should factor into your pricing as well. It is the opportunity cost of running your business. If you weren’t running your business this is what you could make elsewhere. There are lots of sites out there that will help you find the average salary or hourly rate for what you do.
What will the market bear? What is everyone else charging?
Are you providing a product or service that is also provided by someone else in your area? Search online for those competitors. Do they publish their prices online? If so what are they charging? Where do they fall compared to yours? You are going to assume that if these companies are in business they are making money and therefore people are paying those prices. You now have a range of what the market will bear. Now, look at where you think you should fall in that range. What is your experience compared to the others that are offering this service? Are you at the low end, right in the middle, or are you way more experienced? This will help you know where on the range your prices should fall.
Putting it all together.
Now you know what it costs to deliver your product or service, what you could make elsewhere, and what others are charging you are ready to set your price. Did you come up with a price that is more or less than what you thought before? Many of you probably came up with a price that was more.
How you communicate your price varies depending on what you are offering. In the service industry, many companies set their published price and this is what they put on their websites and say when people ask. This is often a higher price than what they actually end up charging. But it gives them room for discounts and deals. This is what most people are referring to when they say, “valued at $”.
You have seen this lots of times. Get this great early bird offer sign up for X service before a certain date and you can have this amazing deal for only $. And then in parentheses, it says valued at $. You’ve already determined earlier how low you can go because you know what it cost you. No longer will you be making snap decisions on what to charge someone and not knowing if you are cheating yourself. Create a spreadsheet so you can even just plug in potential offers and see how they compare to your costs. You know you don’t want to go over your published price and you don’t want to go under a certain price. And now you know those levels and all the possibilities in-between. Pricing now becomes easy and you can be sure you have set the right price.
By: Amy Matthews, CEO, AMI LC