Are you pricing your products and services correctly?
I think the best way to figure this out is to test with actual or potential customers.
- Do competitive research (figure out what other charge)
- Figure out how your product and brand are different than competitors
- Set the price you feel comfortable
- See if customers would buy the product from you at that price
- If not, why not? (capture feedback and details not just "yes", "no", "I don't know")
- Tweak your pricing and try again
I agree with Jef''s comments but would add that a common error made in pricing products and services is a failure to understand your fixed cost structure (including your anticipated wages) and accounting for this when building you costing and quoting.
If when all costs are calculated you are above the market ask:
- Is your product or service better than your competitors and if so why/how
- Will your customers recognise this and pay the difference
- If the answer to either question is no, you need to review your structure, costings & business model.
We often find clients say "oh our customers just won't spend the money". Quite often the client is trying to sell what they perceive their customers "need" whereas long term research shows both B2B and consumers buy what they "want". It is often only a small, emotive change yet the difference in meeting wants is usually the difference between profit and loss.
To understand this better check out this youtube clip re Apple: http://www.ted.com/talks/lang/en/simon_sinek_how_g...
Another good source is Peter Drucker re satisfying customer wants.
Hope this helps,
I have a different approach, more along the lines you suggest Neil.
I've found less than 0.1% of all service businesses have a formula for pricing.
It's actually a mixture of...
- How much work do I have on now? How desperate is the business for sales?
- What are my costs to do the job (measured as materials, rarely labour)?
- Do I want and like the type of work I am pricing?
- How lucky do I feel with winning the job for my business?
- What would the competitors charge for it?
In my point of view, which some entrepreneurs share, the purpose of business is to make a decent, healthy net profit and that's measured by the operating or net profit margin.
If a business has $100,000,000 revenue but 2% net profit, what's the point with all the stress that comes with it?
Having had this conversation with countless businesses what I typically start with is education around what a healthy net profit margin is, which I believe is 15%. It's achievable with most business (with a bunch of strategies introduced over months).
Profit margin starts at the time of the sale so the pricing needs to be based on the net profit margin, or on the gross margin when hands-on technical labour of employees is also included as a Cost of Sale.
So aiming for a minimum gross margin so that all pricing is focused on it so as to achieve a minimum net profit margin (15% is recommended, or 10% to start with), is where I recommend starting.
This means calculating the expenses in the business too.
Pricing based on an operating profit margin is the best method.
When Virgin airlines launched in Australia I am sure someone smart identified what they could get the Cost of Sale and overheads down to and then what sale price could be used to make a healthy net and operating profit margin, before launching in Australia.
Virgin knew that at that time only two airlines could operate in Australia, and still went in, knowing what margins they could achieve and operate at. Knowing this is how they survived (and unfortunately Ansett didn't).
It's a technical process to analyse Cost of Sales to determine what belongs there and what doesn't to get to the gross margin minimum sales price.
Being able to win sales as that margin is the next challenge, but there's many ways that can be achieved.
The very high majority of established businesses (over $700k revenue) are operating with less than 10% net profit margin. Why price match with businesses that aren't making a healthy net profit?
Too many businesses do and wonder why they struggle to pay invoices on time or fail. Don't copy anyone is my motto. Learn from the best and then innovate to create a unique business.
Obviously John they are never going to give the answer you stated. Your whole point is obvious and nothing to do with my reasoning. Every product doesn't need to be sold at 15% but a minimum figure is good management decision. I've turned many struggling businesses around using the described process that are hitting higher margins. Its a smart business decision that is supported with strategies to achieve the higher profit margin in sales.