Pricing for Profit or Fail

This post was published over 1 year ago. Please keep in mind that some of the information may have changed during that time.

More businesses fail because they don’t charge enough, then go under because they are too expensive.

Pricing for profit is essential. If you don’t properly cover your overheads and give yourself a reasonable margin, you will continue to struggle – or worse, FAIL.

A common problem we hear about is someone that is busy but doesn’t seem to be any better off. Often it is a struggle to make ends meet. Stress follows. There isn’t necessarily just one solution. A full analysis might reveal several issues but one frequent culprit is pricing (contact us if this is something we can help you with).

There is a perception that by offering the cheapest price, the sales will follow. Sometimes this might happen, in which case, you are probably undervaluing your product or service – and could become a “busy fool”.

Very few of us buy purely on price. There are a whole host of reasons why something is bought. Convenience and peace of mind are just two. Different people value different things. When pricing, your job is to identify the factors to highlight.

Need or Desire

Other factors come into play and a great deal depends on how you present your product or service. What need or desire can you fulfill?

A couple of years ago, one of our clients was pricing for some substantial work in a restaurant. He had worked out his price using the standard method he always used and were asked to be involved.

What became clear was that the restaurant owner was more concerned about loss of trade, he wanted the job doing quickly to minimise his loss of sales. After a bit of discussion, our client went to the restaurateur with a proposal. He, and his team would work through the night, starting after the restaurant had closed and guaranteeing that the work would be carried out in such a way that the restaurant would always be able to open the next day – so no loss of trade.

It was explained that this was a more expensive option and would take longer however that suggestion was really appreciated. The result was that our client was paid about double the price he had originally intended to quote as the service offered was preferential due to less disruption to the business. Costs did increase but not by a great deal.

Several recommendations by the customer has resulted in quite a substantial – and profitable – business for our client doing overnight refurbishments.

Another of our clients has successfully provided a similar service to hairdressers.

The key is finding out what really matters to a potential customer. I recently got prices for some work, the two cheapest prices could not provide certainty about when they could do the work or how long it would take because they were busy (busy fools?). The third was able to give specific dates and timescales and, despite being 30% higher than the cheapest quote, that’s who got the job.

While the types of thing outlined above are relevant, there are other factors which can affect how customers view a product or service which can affect their decision. Sometimes, there is a suspicion if something appears to be too cheap.

There is a story about a jewellery shop which was struggling to make sales despite being cheap. The owner had to take another job and finally decided to call it a day. She was working at her other job so telephoned the shop and told the assistant to reduce prices by 50%. She intended to clear the stock and close the shop. Somehow her instruction was misconstrued and instead of reducing prices by 50%, they were increased by 50%. Amazingly, sales improved. It appears that customers had been suspicious of the “too cheap” prices and now saw the jewellery more as a quality item.

Increase Profits

Many business owners don’t realise the effect which even small increases in price can have on profits. You may have found work difficult during lockdown – but spend your time planning for profit.

Let us look at an item which costs £100. You could sell it at £120 and make £20 profit. To generate a profit of £1,000, you would need to sell 50 of these items.

If, instead, you charged £140, your profit is £40 per item, so you only need to sell 25 to make your total profit. The question is whether there are 25 people who will pay the higher price. Often there is. Having to stock and sell fewer items can itself result in a greater profit and less work. Just imagine, the extra profit if you could sell 30 at the higher price. This doesn’t mean you should just increase your prices because there is a tipping point where profit starts to decrease. You need to know your customer and your market – plus what they value.

Pricing should not just be a matter of working out a cost and adding a percentage to it. There is a great deal more involved if you want to be highly successful.

We are here to help you with your costing, pricing and all other aspects of business support. Call us today to arrange a “no obligation” chat with one of our specialists. We can do personal meetings in one of our secure meeting rooms or use video conferencing, however you feel comfortable.