| "A business absolutely devoted to service | | | | |
| will have only one worry about profits. They | | | | How do you assign administrative and |
| will be embarrassingly large." Henry Ford | | | | marketing costs by product? Simply divide the |
| | | | total amount you've spent in each category |
| While pricing your product or service is an | | | | over a specific period of time. Then figure |
| important consideration, I think it receives | | | | out what percentage of your total budget (for |
| way too much emphasis and attention. Yes, you | | | | the same period of time) they represent. |
| need to price your product/services wisely | | | | Deduct that percentage amount off your sales |
| after all, you're in business to earn | | | | price. |
| profits. The problem arises when business | | | | |
| owners hyper focus on pricing, instead of | | | | For example, let's say I sold $500,000 worth |
| value. | | | | of products last year. Of that, my $10-widget |
| | | | accounted for 50% of the sales, or $250,000. |
| Below are some general tips on pricing. | | | | My total administrative and marketing outlays |
| However, it's important that you note the | | | | only were $100,000. |
| following: | | | | |
| | | | Since my $10-widget was 50% of my business |
| 1. I am hesitant to recommend universal | | | | I'll assign that product the same percentage |
| pricing strategies for all products and | | | | of costs, or $50,000Âc $20,000 for |
| services because critical variables differ | | | | administrative expenses and $30,000 on |
| significantly by industry, geography, | | | | marketing. Based on earning of $250,000 I |
| personal goals, size, location, and many | | | | should deduct $20,000 or 8% for |
| other reasons. But since you understand your | | | | administrative costs, and $30,000 or 12% for |
| resources, costs, forecasts, and goals better | | | | marketing expenses - $.80 and $1.20 |
| than anyone, you'll have to fill in the | | | | respectively. |
| blanks. | | | | |
| | | | Please do not assume that any of these are |
| 2. I am not an expert in business (or | | | | standard percentages... they vary widely. If |
| personal) finance. This website is devoted to | | | | your company is new you'll obviously have to |
| helping you become an excellent marketer. So, | | | | use your forecast financials. |
| while it's appropriate that I cover pricing | | | | |
| and financial planning as part of the | | | | 3. Perceptual Pricing Categories: A simple |
| marketing process it would be irresponsible | | | | way to begin pricing for start-ups, is to put |
| to delve much further. | | | | your products, services or company into one |
| | | | of three perceptual categories. |
| Tips: | | | | |
| | | | The first is the "elite" group. These |
| 1. Make sure you consult with an objective | | | | businesses are considered "upper crust" |
| financial advisor - one that specializes in | | | | (outstanding services, exceptional products, |
| small business investment capital, cash flow | | | | exquisite environment, and other factors) and |
| management, and the like. Many, many small | | | | their products or services are priced |
| businesses go under due to lack of proper | | | | accordingly. |
| funding. Make sure you have enough money, | | | | |
| particularly in the first couple of years, to | | | | The second group consists of the A- to B+ |
| weather unexpected storms. | | | | companies. Their pricing is competitive with |
| | | | others in their industry - whether that's |
| 2. Arrive at ballpark pricing by assigning | | | | "steep or cheap". Most small businesses fit |
| costs by product. You can start with your | | | | into this category. |
| costs and work up or begin with a proposed | | | | |
| price and work back. Here's an illustration | | | | The third-class of companies fit into the |
| how of this works: | | | | "plain-folk-down-home-workingman" pricing |
| | | | strategies group. They are symbolic of the |
| Let's assume I am (once again) a widget | | | | outlet mind-set but once again, this is no |
| retailer and the following is true: | | | | reflection on their products' value or |
| | | | quality. |
| Money I receive when I sell one widget | | | | |
| $10.00 * Less labor and materials (costs to | | | | At first glance these might appear arbitrary |
| produce one widget) or my cost of goods sold | | | | and silly, but place your company into one of |
| (COGS) * Labor (yours or anyone else's) | | | | the three categories. (Remember, while each |
| - 2.00 * Materials | | | | appeal to different audiences they are |
| - 1.00 | | | | equally valid and offer comparable value in |
| | | | the marketplace.) |
| Gross Profit (amount of money I'm left) | | | | |
| $7.00 This means my gross profit margin is | | | | Next, use the objective product pricing |
| 70% * Less Administrative | | | | you've already established and check to make |
| Costs (rent, utilities, office supplies, | | | | sure it's in line with other companies in |
| furniture, mgmt. salaries, etc.) | | | | your group. If so, reduce the selected price |
| - .80 * | | | | by a small amount- $1.00 to $5.00 is usually |
| Less Marketing (signage, advertising, on-hold | | | | enough. |
| music, business cards, specialty ad items, | | | | |
| etc.) - 1.20 | | | | This is a simple and brilliant way to ensure |
| | | | that you, your customers and your wallet are |
| Net Margin (before taxes) | | | | thrilled - and you're not competing on price! |
| $5.00 50% | | | | |