We are often chatting with new business owners about their pricing. No, this doesn’t necessarily relate directly to marketing, however, it is important to make sure that your business aligns with the market rates and what you’re worth.
In business school we learned about various models to formulate your pricing, however in real life this can be a lot simpler then how the large corporations do it.
There are three, techniques that we often see businesses use. These include using your cost plus a margin, setting prices at the competitive rate, and just choosing a random value. Let’s look at each of these more closely to see how your business can benefit from utilizing them.
Your cost plus a margin
The process here is to figure out the costs of all components of your product or service and add a percent margin over this cost. if you are a dropship store or retail store this is often figured out for you. The wholesale business will often tell you a MAP pricing or minimal pricing that you can sell the product at or the typical MRSP.
If you have a product take a look at the sourcing costs, packaging costs, shipping costs, and admin costs. Add these all up and then increase the price to have a margin of between 30% and 50%.
For a service-based business, you can use a similar frame of thought. Except, rather than adding up the cost of the product, you’ll be adding up the time that it takes to complete all of the different requirements with in a proposal and multiply by your hourly rate. The first step here is to write a list of everything, and I mean everything, that you do for a given client with in that package. When we double checked our calculations for packages this way, we include things ranging from adding the SEO to a blog post, to adding Twitter followers, and costs that we incur with advertising expenses. Our team even built a tool that we utilize that takes into consideration the other pricing models, as well. For any new client, we build the proposal off at this template.
We are currently in the process of building this tool for other service based businesses as well! Please contact me if you are interested in learning more.
The next obvious question here is how do you figure out your hourly rate. You will want to calculate this a few ways. First is figuring out how much you’d like to make every year and how many “billable” hours you expect (or would like) to work each week. How does that hourly rate look? A little high? What about all the other hours you will work prospecting, marketing, and in business development?
If the hourly rate number is within your industry standards or low, rethink the assumptions that you made. Do you really want to set your goal that low? We also always recommend brainstorming other ways that you can bring income into your business that doesn’t require your time and energy.
Competitive pricing is taking the same prices that your competitors use for their business. It’s often an easy way to get started, however, it can also tie you down. Before you simply choose the same price as your competitor, think about your brand. Do you want to be the lowest cost alternative and maybe get more volume? Or do you want to be seen as a luxury good or service?
The same product can be sold at many very different price points depending on how you position your marketing and your brand. Being mindful of this when you first roll out a service will help you with optimizing your marketing strategy and type of client.
Before simply researching what rate the others are charging, first decide if you want to position yourself as low-end or high-end.
Choosing a Random Number
You know your industry, so you may have a gut reaction or sense of what you should charge for your product or service. While I don’t recommend choosing a random number without doing research to back up your decision, often times you will be in the right ballpark. Just work your way back through to make sure you won’t be losing money in the long run!
None of these methods include the value You bring to the table. Sure you can build that into any of the techniques, but it often is overlooked. We once were hired to fill out keywords, meta titles, and meta descriptions for a site with over 40,000 listings that needed to be cataloged. I was to create the initial batch and teach their intern how to complete the remaining 39,900. The page content was all in a spreadsheet, so I created a variety of IF functions and a legend to combine different characteristics of the page to automatically create the SEO information directly on the sheet. An hour getting the formulas working properly and teaching the intern how to replicate the functions saved the company an estimated 100+ hours. In hindsight, I should have learned more about their project and charged based on the value I was bringing to the table.
How did you decide to set your pricing structure?