So, this post will discuss exactly how you can make the most amount of profit from each sale, while giving your customers a great deal too. After all, you want to make sure that they see value in their purchase and that you then win their repeat business.
Before I continue, I want to point out that this post is probably going to be more relevant to business startups who provide services rather than products/widgets.
Traditional 'Cost-Plus' Pricing And Why It's Not Right For Service Based Businesses
Perhaps the most common way of setting a sale price is along the lines of the following, which is often referred to as cost-plus pricing
- Each sale costs you £100.00
- You want to make 25% profit
- You'll set your sale price at £125.00
Then, you'll be able to work out how many sales you need to make to break even and then make profit over a month. For example:
- Your total monthly costs are £5,000.00
- You want to make £1,500.00 profit
- You need to make 12 sales per month (£1500 profit / £125.00 per sale)
Although this seems like a fairly straightforward and attractive way to price your products or services, I don't think it's the best way to ensure the largest revenues and profits. Remember, we're not talking about a large business selling units on mass, this is more geared toward a small business startup, most likely selling a service of some kind.
The main reason that I don't think this is the best strategy for such a business is that it doesn't take into consideration the value that you are offering your customers. A slightly obtuse but helpful way to think about this would be to think about the way that an ice sculpture is priced.
It may only be water and it might only take 2 or three hours to carve, although they are not priced by adding an arbitrary figure such as 25% on top of the raw material and labour cost. A block of ice can be purchased for around £30.00, although an average one-block ice sculpture will cost the consumer around £400.00 (at least).
How can something that is so cheap to make and that will only last a few hours be priced so heavily? Put simply, it's because of the perceived value that I an ice sculpture will add to an event combined with the rare talent of being able to do it.
And that's exactly how I think a small business startup should price their services - based on the value and expertise available to the customer, not just on the cost to the startup.
Value-Based Pricing And Why I Think It's The Right Way To Go
If you are starting up your own business, you must be good at what you do. Ideally, you'll be so incredibly focused on your field that you'll live and breathe it, and none of your competitors will even come close to the level of service and talent you offer. So why not price yourself that way?
When making a decision on which supplier to purchase from, most businesses will consider more than just price. Of course price is a sensitive area at the moment, although I would argue that level of service, reliability, talent an trustworthiness are equally as important when considering a supplier.
If you can make it clear that the reason you seem to be more expensive than your competitors is that you offer something that they do not or cannot - i.e, added value - then your higher prices will seem more justified.
What are some good reasons for higher prices?
- Strong references and good rapport with your prospect
- Offering a guarantee of some kind
- A clear demonstration that you are the expert (qualifications, on-line articles etc)
- Having a unique ability that is not easy to find elsewhere
- Also remember that some people and businesses find piece of mind in paying a premium - this shouldn't be forgotten
In terms of actually working out your price with this method, it's a little more tricky that simply adding a percentage to the cost price. You'll still want to consider a few of the same factors, such as how you want your service to be perceived and what your competitors charge - you don't want to completely price yourself out of the market. Then, of course, you'll need to factor in a figure as to what you see your added value being to your customers.
This may seem like the most difficult way to price your services, although I'd argue that it's the best way to ensure that you earn good profits, which of course will allow you to keep providing a great service, reach your own goals and also to keep going in the quieter months where you may not hit the strict target required by a 'cost-plus' pricing model.
If you are a service based business offering services to other businesses, I'd suggest you keep the following in mind:
- Stay away from the 'Cost Plus' approach - this works best for products/widgets
- Decide instead to adopt a 'value' driven pricing model
- Clearly understand the value that your service will add to your customers business
- Define that value in terms of cost and price your service accordingly
- Keep the prices fair though - you want to encourage repeat business
Pricing is just one of 7 pillars of marketing known as the '7 P's Of Marketing' - it's recommended that you read that post too.
Thanks for reading, I hope you found it useful.
By Alan MacDougall
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Revenue Builder is a small business marketing strategy and tips blog designed to help small business owners and startups maximise sales revenue.