Are You Pricing for Profit?
Pricing your products and services is often the hardest part of being a business owner. A lot of the time you need to play around with your pricing until you find the right balance, but that’s not what business owners want to hear! You could also compare your prices to other businesses operating in your industry and niche, but who’s to say that they’re even doing it right!
When you know you have an excellent product or service and there’s a verified need for what you offer, your business should thrive in terms of revenue and profit growth.
If it is not, you need to review your pricing for each service offering to determine if a new strategy is necessary. This strategy should align with your annual goals and financial budget for the year, so a regular review to ensure you are on track is always recommended.
Creating a new strategy based on pricing for profit
It’s time to look at the three key components for pricing for profit:
Know your business’s profit
This might seem simple but sometimes the obvious needs to be stated. What is your profit at the price you are currently charging for your services? Sadly, a lot of business owners struggle to answer this question.
Before you can make any pricing adjustments, you need to know exactly how much it costs to run your business. If you have a profit and loss statement available, you should have easy access to this information. If not, go through your bank and credit card statements for the last 3 months and get your average monthly operating expenses, allowing for annual expenses such as renewals and subscriptions also. Make sure to include owners compensation in with this! Compare this expense total against your sales, and what is left is your profit. If your operating expenses are streamlined, then the only way to increase your profits is through sales. If they are not, you might want to complete a deep dive into expenses as part of your pricing review. You will need to go through each category of expenses and identify those that can be stopped, swopped or renegotiated.
Know how much time it requires.
I always recommend tracking the time you spend in your business for one week on Toggl. This helps you to understand how many hours you are actually putting into the business and the total amount of hours required to fulfil your service.
How many hours a week do you want to work? How many clients can you support in a week or a month? Look for ways to streamline your offers to either require less of your time or your teams time. Can you find efficiencies in how things are done? Can aspects of what you do be outsourced. Remember, time is money!
Know the value your offer provides to your clients and/or customers.
It’s simple: you can get more clients or higher-paying clients. Ask yourself, what are the benefits that your service is providing to your clients? Are you saving your clients time, money, and headache? What transformation process can you help them achieve? For example, at Accelerate Accounting we help business owners feel confident and empowered to use their financial information to take action that will help them grow their business and create a positive impact on the communities they serve. If we help and support a business owner through that process, there is value in that that is not linked to an hourly fee.
Having thought about this, are you effectively communicating your value to a wider audience of potential clients who are looking for exactly what you have to offer? Can you articulate the value you provide?
Four signs you are undercharging
As part of the process you should also look out for the signs below that you may be understating your prices.
1. Can you pay your bills?
If your business is doing well and income is coming in, but you are still struggling to pay your bills, you could be undercharging. It is also possible that it’s related to mismanagement of your cashflow or other areas you are struggling with, but if you have good traction with your services and you budget, but you’re still not bringing in enough, you need to review your pricing. Maybe you hadn’t taken into account all business expenses, or how much you need to take as owners compensation, at the time you set your prices. These are the types of things you need to look at.
2. You are so busy you can’t keep up with business
This normally happens when you’ve been in business a while and demand has gotten bigger than you’re able to supply. A good complaint! This is the time to consider a price increase as your services are valued at a higher price than you are putting on them.
3. Business is slower than it should be
You’ve got a good audience and engagement but you are not getting sales. This is where many business owners start out, underpricing their services as they start out to get experience and testimonials. However, there is a psychology behind this. The human mind often equates value with price, so if a potential client really values what you are going, and then sees a price proposal that’s at odds with what they think you can provide, this won’t make sense to them. If something is priced too cheaply, they may think that this is not the service they are looking for. This is a very tricky one to tackle, which is why service pricing can be difficult.
4. People are telling you your prices are too low
They won’t literally tell you this, but you’ll hear comments like “you’re the best price out there” or “that’s less than I expected”. You want your clients to see you as good value, and not cheap. This is the most obvious sign you are undercharging! If you are hearing these comments, listen to them!
Now that you have looked at the key components involved in pricing for profit and the signs that you may be undercharging , what changes do you need to make in your pricing strategy?
Are you going to increase prices without changing your offering?
Do you need to tweak your marketing messaging so that the value you provide is clearly communicated to those that are interested in your service?
How can you increase the value of what you provide in your current offering?
Taking a short time out of your business to review your pricing strategy will have a long lasting positive impact on where your business is headed.
If you are interested in getting support with your pricing or other areas of your business finances, reach out for a chat!