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