CHAPTER 11
pricing and process
HOW MUCH SHOULD you charge for your product or service? In theory, you know you want to make a profit, so that means you need to charge more than it costs you to make and deliver your product or service. But in practice, it isn’t as easy as it sounds to determine the right pricing structure for your business.
Finding the Perfect Price
Pricing a product is a little easier than pricing a service because there are hard costs associated with the production of the product, leaving fewer unknowns. But whether it’s a product or a service, the basic equation is:
cost + markup = retail price.
Of course, your actual cost consists of more than just your out-of-pocket expenditures. That is, your cost includes both fixed and variable items. Your fixed costs are the items you buy that go into making the product. The variable costs include marketing, business overhead, salaries, travel, sales commissions, shipping, and so on. To determine the full cost of producing a product or service, you must allocate a percentage of the variable costs to each item you produce and add that to the fixed cost.
The appropriate markup for a product is fairly simple, based on what is generally accepted in your industry. Many retailers customarily use a markup of 100 percent. A wholesaler is going to use a lower markup. But, once again, that depends on the product and industry. It is more difficult to determine the appropriate markup for services. To get a general idea, check out what the competition is charging—the going rate for your type of service. As a rule of thumb, you don’t want to be the most expensive, but you don’t want to be the lowest-cost provider either.
In part, your markup is determined by how much profit you want to make; however, there is more to consider, such as what the market will bear—and this last factor is subjective. The market’s receptiveness to your pricing depends on the value it places on the product or service. Some customers pay hundreds of dollars for a haircut, while others won’t spend more than $20 or $30. Car fanatics often shell out hundreds of thousands of dollars for prestigious, high-end sports cars, and then there are people, like me, who really don’t care what they drive. If you have no idea what is standard for your business, check the Annual Statement Studies published by the Risk Management Association (RMA) to get averages. The information is also available online via the RMA website, www.rmahq.org.
Don’t Sell Yourself Short
Often one of the big mistakes new business owners make is not charging enough for their services. Sometimes it’s because they don’t understand their cost structure, and sometimes it’s because they are so desperate for the business that they’re afraid to charge more. Regardless of the reason, charging too little is not a good idea. It will not bring you more business and it may actually drive business away.
If you believe your product or service offers customers great value, then trust that customers will pay for what they perceive is of value to them. Your challenge is to communicate the value you offer. Alternatively, if you charge bargain-basement prices, not only do you look desperate, but it implies that your product isn’t valuable. If you don’t value your business offering, why should anyone else?
Competing in the marketplace on price alone is a huge mistake. There is always someone out there who will be willing to provide the product or service for less than you can. That’s particularly true if you are competing with major chains or retail discounters. You are almost never going to win at that game. They have more resources and can sustain a low profit margin, or even a loss, until they have put you out of business. Plus, once you establish low prices, it is difficult for customers to accept higher ones.
I learned this lesson early on. One of the services I sell is keynote speeches. When I first started speaking, I always underpriced myself. In fact, I sometimes accepted bookings for no fee and payment of expenses only, thinking that would bring in more engagements. Then I started talking with other speakers, and I asked them how they went about pricing their speaking services. Boy, was that ever a wake-up call! I realized that by trying to be flexible and open to opportunities, I was actually diluting my brand. So I established a fee structure and added a booking agent to my team. Now, I get more speaking engagements and earn a fee that is on par with others in my field.
Not All Sales Are Good Sales
Are you surprised that I would suggest such a thing? After all, you do need sales to build your business. But to build a sustainable company, there are times when less is more, and you need to recognize those times.
As I noted, many small businesses reduce their prices with the goal of generating more business. However, even if sales do increase, your company’s profitability will end up suffering. In fact, even when gross revenues look good, it’s possible that your company could reach a point where it is in a negative cash-flow position. (This can happen especially when your business is offered a new opportunity that drives it beyond what it’s been doing with the overhead and markup you’ve established.)
All new sales opportunities must be considered carefully. Such situations are difficult to turn around, which is why not all sales are good sales. Before you forge ahead, you need to analyze your internal costs, including all your business overhead. Is there enough profit to absorb any changes or adjustments? Do you have the current staffing and resources to manage the new project without jeopardizing existing business?
Here’s a real-life example. ABC Company bid on a large government contract to deliver a particular service without first doing a detailed and thorough analysis of the resources required. After winning the bid, it found that the additional internal resources and development needed to execute the contract turned what the owner thought would be a highly profitable project into one that barely broke even. Furthermore, because of the strain on the company’s resources, other projects had to be delayed.
I’m sure you’ve heard the expression “Cash is king.” This is true for any business, and no company can jeopardize its financial health by selling too much for too little. While it’s hard to turn business away, you can be more successful by concentrating on the business opportunities that will be most profitable. And it’s not always just about turning away new business. Some companies are choosing to fire their low-margin customers, and as a result are experiencing healthier bottom-line profits.
Every Business Needs Process
In addition to developing an appropriate pricing structure, you need to create the systems that will help your business run smoothly and efficiently. Systems provide sustainability for your company—whereby work can be replicated time and time again, with consistent results. Without the proper systems in place, your business will suffer from lower productivity and potentially serious mistakes, which can result in lost business and profits.
To create the right processes for your business, analyze all your operations. Review the work flow, including your own. Are there ways in which things could be managed more efficiently? Are certain activities being repeated unnecessarily? Do you follow the same course of action for every project, or are you constantly reinventing the wheel?
Once you get a handle on the best way to manage each of the various aspects of your business, document those processes. As your business grows and you add team members or new offerings, update your process guidelines. Even if there are only a couple of you working in the business, document how things get done. What would happen if you got sick or were hit by a bus? Documentation gives someone else the basic information they would need to manage your business.
When we were growing ItsYourBiz.com, one of my partners, who happened to be the architect of our technology platform, was diagnosed with stage-three melanoma. Suddenly, one of the key players of our team was missing, and unfortunately he hadn’t written down all the means and methods—the keys to the kingdom. As with many entrepreneurs, the three of us kept much of the information about business operations in our heads. And that cost us—financially and in terms of lost opportunities. Fortunately, we managed to survive, but not all businesses are so lucky. Often the loss of a key player results in the actual demise of a business because proper documentation and systems haven’t been established.
Leverage Technology for a Competitive Advantage
Technology is the driving force behind the surge in small-business start-ups. Technology levels the playing field and allows small businesses to do business anywhere in the world from anywhere they choose. As technology continues to advance, small companies are enjoying the benefits of increased productivity and profitability.
So every small-business owner needs to embrace technology in every aspect of the business, from things such as accounting and data management to marketing and sales support. If you aren’t familiar with all the technology-based tools available for your business, then I recommend working with an IT consultant who can help you select appropriate hardware and software to fit your business needs.
• Create a technology vision. You’ll need a technology plan for your business, and a professional consultant can help you develop that. A technology plan prevents you from making the mistake of jumping from one system or application to another, which isn’t efficient and can be costly. A technology vision helps you make choices that will be appropriate for your business now, and will also grow with your business.
• Buy the best fit. Small-business owners can get caught up in the glitzy aspects of technologies, and as a result, they often buy more than they need. Purchasing the latest and greatest not only results in unused capacity, but it may also result in the technology not getting used at all because it is too complicated. So make a list of what your business needs are now, and what they are likely to be very soon, and make an investment in technology that satisfies those needs.
• Establish a budget. Just as with any other area of your business, you need to establish a budget for your technology. An IT professional can help you determine the appropriate amount you should allocate in order to meet your objectives. Without an established budget, you may wind up out of funds before you’ve been able to purchase everything you need.
• Get training. Technology isn’t worth a dime if you don’t use it. So invest in the proper training for you and your team. Often the vendor will offer to train you for no additional cost. Take advantage of this opportunity and carve the time out of your schedule so you can utilize your investment. Remember, the technology is there to help you become more productive and profitable.
An Office in the Palm of Your Hand
Mobile technology has taken the small-business world by storm. Because of smartphones, tablet computers, and iPads, entrepreneurs can stay connected and in control of nearly every aspect of their businesses from anywhere. It is a game changer.
A survey from Staples, the office supplies chain, found that small-business owners spent 60 percent more time holding their mobile devices than holding the hand of a significant other. Some may find this a little sad—letting smartphones and mobile devices permeate every minute of our day. But on the other hand, for small businesses that are embracing the new technology, it brings more balance to the owners’ lives. The smartphone can be viewed as a handheld virtual office. So, if you want to duck out of the office to head over to your child’s soccer game, you can do it. It is the ultimate multitasking tool.
Smartphones are basically small computers, and they are changing the way many small businesses do business. A smartphone can do most anything your computer can do. (Of course, if you’re over a certain age, reading glasses may be necessary, but nonetheless, the capability is there.) But if you aren’t up to speed on everything your smartphone can do, let me hit some of the highlights. All of these options can help you run your business smarter, faster, and better.
• Bookkeeping. There are applications that allow businesses to track income and expenses and sync everything in real time with their accounting software programs. This increases productivity and accuracy. Because I travel a lot, I use my smartphone for keeping track of expenses on the road. As a result, I don’t forget to write things down or submit expense reports. Without a doubt, it has saved me a significant amount of money.
• Credit card processing. You can take credit card payments via your smartphone now. So if you’re selling out in the field, it’s a quicker and easier way of processing payments.
• Inventory and time management. Real-time inventory management tools provide a method for small businesses to track their inventory much like a large company, leveling the playing field. For service companies that bill by the hour, there are time-tracking tools—which means no more paper time sheets.
• Marketing. More companies are using mobile text messaging for marketing. Incorporating text numbers into any television, radio, or print ads makes it easier for customers to make quick purchases. And let’s not forget social media. The smartphone connects you to all social media applications so you can manage your marketing activities from anywhere. According to Facebook, more than 200 million users access its site through mobile devices. What’s more, those who use social media on the go are more active on the sites than nonmobile users. Personally, I manage everything from my phone, so when people say they don’t have time to utilize this marketing tool, I simply direct them to their smartphones.
The possibilities for newer and better productivity and management tools are endless. So, could the smartphone be the answer to work/life balance? I can’t say for sure, but it does help a small-business owner manage operations more easily. It certainly helps when your entire office is in the palm of your hand. Bottom line: As a small-business owner, consider investing some time in educating yourself about the mobile applications that can help you grow your business.