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Everyone wants the secret recipe to making money – that one strategic trick that separates successful businesses from those still treading water long after launch.
So what differentiates the rising stars from the floundering bit actors?
Ladies and gents… that open secret is accurately pricing your product or service.
Learn more from Abina in her #smallbiz_expert Twitter interview.
Learning how to prices your services or products is a challenge that everyone encounters, a critical voice that asks: Are my services priced right? Did I utilize the right benchmarks to inform my pricing?
There are many complexities and pricing strategies involved when putting a cost on your product or service, and many avenues where people flounder.
There are three key areas where entrepreneurs run into problems with pricing their services:
Problem 1—Too Influenced by Competitor’s Pricing
When entrepreneurs first start their business they often set prices by:
- Researching the market and charging the same as their competitor
- Charging whatever they feel they’re “worth”
- Guessing a price based on their gut feeling, and slowly increase it over time
While these techniques can be okay first steps, I’m here to tell you that forming your business pricing strategy with any of these tactics is misleading. It will impede the growth of your business and revenue.
This is because these strategies are based on external, rather than internal notions of pricing. Just because someone is charging a higher price than you, or you hear countless stories of how it worked for other entrepreneurs, doesn’t mean it will work for you.
You don’t know the factors your competitors took into account when they established their price. The more you focus on what someone else is doing instead of what works for you and your business, the more you set yourself up for financial failure and lack of authenticity; or more importantly, business growth.
Problem 2—Undervaluing your Services
Many entrepreneurs think that the best way to increase their customer base is to undercut their price to appear more competitive. This tactic, often used by impatient entrepreneurs who want everything to happen immediately, can create a burst of buzz, leads, and sales, but it is often not sustainable in the long term.
Cutting prices on your services undervalues your time, patience, and diligence.
It results in lethargic movements that only focus on short-term gain rather than long term strategy.
You need to have short-term gains that focus on long-term strategy; sacrificing one for the other is never the right approach in soliciting business.
When you cut your prices for short-term gain, you leave money on the table. Not only in the first transaction, but also for your long-term business health – you damage your brand credibility and future prospects.
Problem 3—Underestimating Time Commitment
Something that too many entrepreneurs underestimate, to their detriment, is the actual time it takes to perform a service or create a product.
Influenced by external ideas of what their price should be, they gloss over the production, marketing, and sales work needed to attract and retain customers. This leads to overworked, under-compensated, and ineffective teams.
A careful and rigorous assessment of the time it takes for your product or service to get to market is the best way you can identify the right price for your brand and keep more money in your bank.
Now that you know the pitfalls, how do you avoid them? The first step is an internal business audit so you can correctly price your products and services based on the resources needed to create and execute them. I call this:
Internal Pricing Valuation
Smart business starts with precision pricing, a necessary first step to defining the role of your business in the marketplace.
Before you even start looking at the competition, you need to evaluate your internal costs, both in money and time, to inform your pricing approach.
If you are selling a product, first identify start-up costs—how much does it cost to create that product?
After you’ve pinpointed that price, identify time costs—how long will it take for you to create that one product, and to market and sell it?
These two values give you a sense of what you need to be charging to break even.
If the difference between your selling price and start-up costs doesn’t equal or surpass what you expected to make for that product, you need to reassess your pricing and identify a price point that makes your efforts worthwhile.
If the number is where you want it to be, then congratulations! You have priced your product accurately. Now you can start thinking about ways to increase the price to grow your profit margin when the timing is right.
If you are unsure how to complete this exercise, you can ask your team or even have an expert help you accomplish this task. Resourcing to a pricing expert is a smart investment that will empower you to approach pricing from a competitive growth mindset.
Selling a service rather than a product? This exercise is trickier, but the result is just as effective. When you are selling a service, it is all about getting results efficiently.
Your start-up costs and time costs bleed together, so you have to be careful to price things in a way to make sure you are properly compensated.
Don’t just focus on the numerical value before naming your price. Remember the time. As the famous saying goes, time is money—though often perceived as a trite adage, this statement is a true testament.
By always making sure to factor in your time, from hands-on work hours to coordination calls or email follow-up, you will always charge what you’re worth. Unfortunately, we do live in times where price is a factor.
It’s a big decision when people choose to spend money on a service, but if someone truly values the work you do, they will understand and commit to your price.
Another essential element to internally define before benchmarking the competition is the unique value proposition of your product or service—this is what will persuade the customer to choose and invest with you instead of a competitor.
Ask yourself, what makes your brand unique? What are the distinguishable factors that separate you from your competitor?
By creating and selling an experience that can’t be replicated or duplicated, you will make your clients open their bank for you.
Once you have a keen sense of your internal costs, the pricing structure necessary to drive a profit margin, and your unique value proposition, it’s time to benchmark the marketplace to see where your unique brand and service fit in.
