Here are some of the common pricing models and how they can trip you up:
Pricing according to your competition.While it is good to know what the competition is charging, no two businesses are ever exactly the same. Even if you are selling a commodity product, you can differentiate yourself with things like free shipping, excellent customer service or even just a personal touch and better followup.
Guessing. Not understanding the true costs of your products or services can mean leaving money on the table (or even going backwards). You need to consider the cost of the time (for services) or the cost of the products AND include overhead for your company. Things like accounting services, rent, utilities, salaries and other factors can mean that you need to increase prices.
Not updating prices. It can be easy to leave prices at the levels that you had years ago. After all, telling long term customers that they are going to need to pay more is never fun, BUT you need to make a profit in order to stay in business.
How SHOULD You Price Your Products Or Services?
Your revenue is determined by by how much you charge for your goods and services. Pricing your products or services too low can mean that you are “giving them away” and not making a profit. Pricing them too high means that you might sell more at a higher margin, but still not enough to cover your operating expenses.
Here is a good example for knowing how to price your goods or services:
In this example your business has a Gross Profit Margin of 40%. A 10% decrease (or increase) in prices will decrease (or increase) Gross Profits by 25% (assuming no change in volume). Depending on the level of fixed expenses, net profit will change more dramatically.
Sometimes business owners consider decreasing their prices to make it up in volume. Using the same a assumptions – 40 % Gross Margin and a 10% price decrease, if you are selling the units at a lower price and a 25% lower margin, you’d have to sell 35% more volume just to break even on your price discount!
If you need help determining the correct price for your services, ActionCOACH Tampa Bay can help! Give us a call today to find out more 727-786-2900