PRICING OF NEW PRODUCTS/SERVICES
For the past 15 years I have run a communication training, research and consulting company. In addition to that I have been involved in assisting numerous people in starting home based businesses. Being a sustainable small business you need to market and price your product for your market. Pricing it too low is as big a danger as pricing it too high. The reality is that “there is a price war” and you need to constantly make adjustments to be sustainable.
Please share some of your top tips on how a business owners should price a product/ service. When starting a business in the same line as the job, you can use your salary as a basis. You calculate your hourly “cost to company” rate. Unfortunately you will have a lot of “non-fee earning hours” which you will use to market, deal with admin, build a network. If you need to earn the same amount at the end of the month you either need to work the 40% you need for that after hours or you will have to add that to your hourly rate. If your cost to company was R80 000 per month, your hour cost to company was R667,00. Adding the 40% non-fee earning time would give you an hourly rate of R933,00. This is a reasonable amount for a senior consultant.
Is pricing for products and services very different? It is easier to cost a product because calculating the cost of the components is easier. A service would be influenced by subjective factors like the value you will add to the company with the service you are rendering.
Should a service business price by the hour or by the job? If you cost only per hour you will never be sustainable. Having said that, you start by costing a project by the hour and then you consider factors like the value the project will add to the organisation, the size of the company and the competition in the market.
Do small businesses need to follow a pricing formula? If so, are they effective? ? Yes, that is why I recommend you start with the basis of cost to company.
What expenses should I factor in when determining my costs? In my research business I have a list of items that will impact on the duration and difficulty of a project. For instance focus group discussions with ethnic speakers will be significantly more expensive than with English speaking participants. Hidden costs like flip chart papers, board markers and notepads can drain your profit, keep them in mind. And in some cases it is necessary to add a “Prozac premie”. Overtime you get to know your clients and you know some will take three times as long to approve anything and then you need that premie. And some clients are just so difficult that you need to make the project more attractive for yourself – so you add that.
What are the biggest mistakes business owners make when pricing a service or product? Being unaware of the going rate. If you are too expensive or too cheap you will loose clients.
How do I know whether to come in high or low in comparison with my competitors? If you sell a product, it is easy, you can see at what price your competitors are offering theirs. If you sell training, you can see what other organisations charge per day and per delegate. If you offer consulting or research, it is more difficult. If it is a tender process, you may ask at what price the competitors offered it. If it was not, you would never know.
Should I lower my price to make my business look more appealing? Yes, but only to a point where it does not make sense to offer the service anymore. If it will cost you more to render the service or provide the product, rather not. In some situations it might be possible to find a less expensive supplier, but again the quality of the less expensive supplier might not be the same as that of your existing supplier.
And when everything is said and done – the ideal is to have product that people want so much that price is not a factor – e.g. a Tesla. However we are talking about SMME businesses, and most of them start off by marketing their products and services at the right price to the right people.
And one last warning about pricing – when clients tell you that “they are building long-term relations and if you give them a discount on this one, they will buy more in future” tell them in a firm but friendly way that you are also building long term relations with clients and that your discount on the second and third order or training session is really attractive.