Last Updated: Apr 19, 2017 How do you figure out what to charge? How much is too much and how much is too little? Setting prices for your products is one of the most important business decisions you’ll make. Here’s what you need to keep in mind when deciding what to charge.
It seems so easy, right? You charge enough to make money, but it’s far more complicated than that. What you charge determines the future of your business. You can charge too much and you can charge too little. Each leads to the same result: failure of the product and/or failure of your business. Here’s what you need to consider before putting your product up for sale.
Every successful business owner first knows their numbers. If you designed and manufactured the product, you know every piece and part. You know the price of each component including all associated costs like shipping and labor. You carefully considered the best way to manufacture a quality component in the most cost effective way.
In other words, you have the cost of the item detailed to shocking proportions.
If you’re reselling the product, your numbers are less complicated but equally important. You know the product and shipping cost and you shopped every vendor you could find to get the best deal. You formed relationships that led to terms that keep the costs as low as possible.
Along with the direct costs, you know your indirect costs. Overhead costs like labor, utilities, insurance, licensing, and taxes get calculated on a per product basis. The direct cost plus the indirect costs are what you consider “cost.” Your cost includes everything.
You’re probably like most small business owners—you could get a little more detailed with your costs. If you know all of this information, congratulations. If not, do some digging and recalculating before you attempt to answer the question of what to charge. For the purposes of pricing, we’ll not take into account indirect costs since businesses vary widely, but you’ll have to add those costs before landing on a price.
You know that the margin is the difference between your cost (not including operating expenses) and your sale price. If your cost is $10 and you sell it for $20, your margin is 100 percent, but what is considered a good margin?
First, understand gross versus net profit margins. Gross margins don’t take into account operating costs. 100 percent gross margin is considered fantastic in most businesses. Grocery stores, for example, operate around 26 percent gross margin.
Auto dealerships, however, operate between one and two percent on average. For higher priced products, normal (not filthy rich) consumers can’t afford to pay a 50 or more percent markup, but a one percent margin could mean $500 or more in profit. The lower cost your product, the higher your margin, in general.
It’s Not All About Price
If it were only about costs and margins, pricing would be easy but here’s where it gets complicated.
How new is your product or business? If nobody knows you exist, you have to do something to get potential customers to your doors or website. Sometimes offering your product at a bargain price is a great way to build a customer base. This is why tech companies sometimes offer free versions of their products.
What’s the nature of your business? If you’re a discount store, you’re business revolves around price. If you’re selling Rolex wristwatches, most of your customers don’t see price as their primary concern. (If you have to ask, you probably can’t afford it, right?) Your type of business has some determining factor in your pricing strategy.
Are you going to be the business that charges less to sell more or charge more and sell less? Each strategy can work, but you have to find the sweet spot. Do this with a little market research. Put together a survey along with some product samples. Let 20 or more customers try your product and ask them to pick from a list of prices how much they would pay for your product.
If the market won’t pay enough to cover your costs and leave you with a margin you’re comfortable with, you might have to rethink your product, but if you have a quality product, they’ll likely pay more than what you thought.
Pricing is Fluid
Some products will generate huge demand. In that case, raise your price slightly. Others will not and you’ll transition those into liquidation pricing. Most businesses don’t want product sitting on shelves too long so don’t be afraid to cut your losses when something doesn’t work. Fill your shelves, virtual or physical, with moneymaking products that you can price for profitable margins.
Don’t expect to get it right the first time. Think about all of the products that companies with expert marketing teams put in front of the consumer only to watch them fail miserably. Owning a business is all about responding to what the market throws at you. As long as you’re doing that, you’ll find success.
Has your small business fallen on hard times? Are your sales and profits declining? To recover you need to take action and make changes. Here are 21 strategies you can use to put your business back on track to success.
Has your business fallen on hard times? Running a business is never a sure bet, but sometimes it can feel like you’re caught between the proverbial rock and hard place. Thanks to the Internet, you can reach customers outside of your local area. But at the same time, your customers find it easy to go online and compare prices, find product information and make purchases from companies across the country, or across the world. As a result, you may have customers calling to cancel orders or asking you to cut prices. And big companies who bought services from you in the past may be outsourcing them overseas.
Whether you target businesses or consumers, there’s a good chance your customers have less time, and less patience for sales pitches than they did in the past, too. They may find that researching and shopping online is preferable to talking with a salesperson or traveling to your retail location.
And then there are other problems. Even if you can compete on price, your company may not be found online. Labor costs and other expenses may be rising, and changing customer needs and preferences may be putting a big crimp in your sales and profits. How many bookshelves can you sell to people who read books on their e-readers or tablets?
What can you do when your small business falls on hard times? How can boost sales and profits? The answer is to be proactive. Here are 21 strategies to consider:
You don’t have to be a big, high-tech company to reinvent your business. In fact, the smaller and leaner your business already is, the faster you can shift gears and zoom back into action.
Sit back and take a cold, hard look at your strengths and weaknesses and possible markets. Ask yourself the hard questions first: Do customers still want and buy the same type of products or services you sell? Have industries and styles changed since you started business? Have you kept up with the changes? If not, what changes should you implement now to make your business competitive again?
Do you need to develop new products or services? Don’t guess at what customers want and will pay for. Analyze your existing sales and talk to actual customers and prospects. What do they need? What can you provide? What’s the best way to deliver solutions to them? What’s going to bring in the most profit?
Is there any particular niche that buys regularly from you now? If so, consider how you can bring in more of the same types of customers, and what other merchandise they’d be likely to buy.
Are you selling your products and services online? If not, why not? If your sales are declining and you aren’t selling online or capturing leads online, it’s time to get your head out of the sand. Even when people buy in-person or on the basis of personal relationships, they are likely to research the products, company or consultant online before making a decision on what to buy and from whom to buy it. If you have a business, you need a website. The type of website, and what should be on it depends on what you sell.
Do you have a social media presence? Social media may not be your cup of tea, but the Pew Internet Social Media Update 2016 found that 68% of all U.S. adults (i.e., Internet users and non-Internet users) are Facebook users, while 28% use Instagram, 26% use Pinterest, 25% use LinkedIn and 21% use Twitter.
Find out which of the social media sites attracts the types of customers you want to reach and then get active in those channels. Post comments, answer questions, start discussions related to your products and industry. If you don’t have time, consider having a trusted staff member handle social media tasks. Consider advertising on social media sites, too.
An ever-growing percentage of business people and consumers are reachable electronically via computer, smart phone or tablet for a majority of the day. These people include everyone from teenagers to retirees. The Internet – thus their ability to search for vendors, products and prices and be notified of deals (as well find the nearest restaurant or gas station) – is no longer limited to their desktop computer. It’s on their tablets and smartphones. You need to be accessible by the devices and methods the customers you want to reach prefer.
Don’t assume that a former customer who stopped buying from you in the past will never buy from you again. Customers’ needs and circumstances change, just as yours do. The megacorporation that didn’t renew your contract a couple of years ago because of changing business priorities may have changed their direction once again and be a good prospect now. The customer who went with a lower-priced competitor may be dissatisfied with the quality or service and be receptive to a call from you today. Or, the manager who had given the work to his best friend may no longer be with the company.
If a company needs what you sell, there’s a good chance their competitors do too. Industry groups you belong to, trade shows, seminars, and friends in the industry can all help you identify likely prospects. If the people you meet don’t need your services, ask if they can put you in touch with someone at their company who could.
The bigger a business, the slower they are to move. The project that was put on indefinite hold last summer may become urgent this spring. Or, some other project the company is working on may be right up your alley. So touch base periodically. The more recently you’ve contacted a prospect, the more likely they’ll be to remember your name – and your phone number – when they are ready to buy.
Often the easiest way to bring in new business is to sell more to your existing customers. You may be able to sell more of the same product to the same contact, or sell the same product to a different division of the company. Or, you may be able to sell related products and services to the customer. Keep your eyes and ears open for new opportunities and be sure your customers are aware of all of your capabilities.
If you provide services to homeowners, market to homeowners near your customers. When a homeowner needs to hire a contractor, they often ask neighbors who they use to do similar jobs. Keep your name in their minds with mailings and local online advertising. Leave extra business cards with your existing customers (so they can give them out if anyone asks for your number).
Labor statistics show people entering the workforce today are likely to change jobs seven to 10 times in their careers. You can position yourself for new sales just by keeping in touch with people as they change jobs. The human resources manager who hired you to do a harassment awareness training program for Company A, may need to find someone to put on the same kind of seminar at Company B. Thus, if a contact at a client company tells you they are leaving the company, ask them for new contact information.
Recommendations and referrals are among the leading sources of new business for small businesses. An easy way to get more referrals is to team up with other businesses who sell to the same market but don’t directly compete with you. Agree to refer business to one another and link to each other’s web sites. Look at possibilities for joint sales, as well. Doing so may allow you to bid on and win bigger projects than either of you could on your own.
That’s corporate speak for a concept that’s as old as the hills: find more ways to make money. For instance, could you add landscaping services to your lawn care business, or add coffee rolls and muffins as choices at your bagel shop? What about adding a delivery service or catering to your restaurant business? If you are a writer whose market is drying up, hone your skills to write how-to articles, blog posts and social media content for businesses. Or, learn to do social media marketing for businesses, and add that service to the writing services you offer.
If you buy a substantial amount of goods or services from any company, ask them to give you a discount. Remind them of your long-standing account and frequent purchases. If their competitors charge less, ask them if they can match the competitor’s pricing.
If your current vendor won’t lower their price, or won’t lower it enough, consider switching vendors. Give the new vendor smaller orders at first, and then increase them in size if their quality, on-time delivery and service satisfies your needs.
The fees charge to process credit card transactions can be significant. If your sales are higher now than when you first got your merchant account you may be able to get your existing merchant account provider to lower your fees. If they won’t, contact their competitors and ask for their best rates based on your sales volume, type of business and years in business.
If you are a good tenant and your business is located in an area where there’s a lot of commercial retail space for rent, your landlord may be willing to lower your rent a bit to keep you from leaving or defaulting on your lease. Even if they won’t lower the rate permanently, they may be willing to reduce it for a few months to help you get through the tough times. The only way to know: Ask. All they can do is say no, and they might say yes.
No business owner wants to think their employees would steal from them, but employee theft and fraud is a very real problem for small businesses. Losses from internal theft can be enough to cause a company to fail. Often the perpetrator is a trusted employee, or sometimes a partner.
If you are like most business owners, you dislike firing employees, and may put off doing so far longer than you should. Perhaps you feel uncomfortable confronting employees who aren’t living up to expectations, or you may worry about how being fired will affect their family or self-esteem. If your business is starting to falter, however, you need to weed out the employees don’t measure up.
If business is slowing down, you may not need your employees to work as many hours every week. If possible, try cutting the hours for some or all of your staff a little each week. Your employees won’t be happy with the reduced hours (and income), and some may leave, but if you can reduce your payroll costs, it could save your business.
Take a careful look at your advertising and marketing expenses. Are you tracking results? Do you know what campaigns bring you business, and which don’t? What advertising and marketing strategies produce customers with the highest lifetime value? Focus on the strategies that bring in the most business, and consider eliminating, or at least temporarily suspending the rest.
There are dozens of ways you can promote your business and reach a very targeted audience without spending a fortune. Review strategies that work for other businesses, and put them to work for your company. Pay particular attention to email marketing. It is one of the most cost-effective strategies for getting prospect and customers to remember and buy from you.
Prioritize and Act
As you review your business, you may see many areas that require change. The key to making change happen – and rebuilding your profits – is to list what needs to be done and estimate what effect each change will have on sales and profits. Then prioritize the list. What are the easiest ways to increase profits the most quickly? What should you be doing on a longer-term basis to ensure your business continues to grow and prosper? Revise your business plan based on your answers, then start to work your plan.
About the author: Janet Attard is the founder of the award-winning Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets. Follow Janet on Twitter at http://www.twitter.com/JanetAttard.