How to Price Your Products + Services Appropriately
Today's blog is all about pricing. This is a biggie because, in order to make money, your pricing has to be right so that your profits are there. If your pricing is too low it’s detrimental to your profit and that is why you are in business - to make profits. So I'm here to help you give you some strategies on profits so that hopefully you can decrease your stress, which normally comes with business finances, and in turn increase your profits.
So, we're going to just dive into this really quick! To begin with, I want to tell you that I see a lot of people who come to me and I see people in groups on Facebook, and their pricing is low, but they're not really sure why they're pricing this low. I want to give you three indicators that your pricing may be a little low.
1 - You Surprise Your Customers
The first thing is that your customers are surprised when they visit your website and they see what your prices are, or you send them that proposal and they just jump on it really, really quickly because you're underpricing things.
2 - Trust Your Gut
The other thing that I want to just point out is trusting your gut. If you’ve got that feeling that you aren’t pricing high enough, you’re probably right. If I have learned anything being in business for the last 11 years, is that your gut usually does not lie to you. Being an entrepreneur, we just have that feeling inside sometimes when things are not right, or when things are right. I know my business coach asked me all the time, “So what's your gut tell you?” You know, do a gut check. If you're not sure do a gut check. And I want you to do that with your pricing.
3 - Profit
The third indicator is (this is a biggie) is that you're barely making any profit or maybe you're not making a profit at all. Pretty simple.
Those are three of the most common indicators that your prices are low, and it's time to reevaluate! Iif you're not reevaluating your prices at least once a year, you're leaving money on the table. Our market is so fickle and it changes so much, so it’s very important that you go back and you reevaluate things.
There's three ways that I commonly see people determining pricing…
1 - Random
The first being that you're just randomly picking a number. You're selling a website or you do website design, and you just go “Okay, 500 bucks”. Yet, you have no reason why you came up with that number. A number popped in your head and that's what you went with - that's not a good strategy. You should not run your business on a whim.
A lot of the time I see people do competition based pricing where you go to your competitors and you're seeing that they price a product similar to yours for X amount. So you either say, “Okay, I'm going to go in line with that competitor, or I'm going to undercut the competition just a little bit.” I see a lot of people pricing their items this way, and that's okay, but to me, it's not the best way.
2 - Value Pricing
The next way is value pricing. Value pricing simply means that I feel that my value on this service is X amount of dollars - so that's what I'm going to price it as. The problem that I see with value pricing is that most entrepreneurs do not value their services highly enough, therefore their prices are too low. Many of us, including me, suffer from imposter syndrome, which means we just don't feel like we're good enough to price our services at the point that they should be. Okay. So again, value pricing is okay. But again, it's not my favorite.
3 - Time Based
The final way is time based pricing, which simply means I worked on a project for X amount of hours and I'm going to charge X amount an hour. Again, going back to website design, I take three hours to design my clients website. I'm going to value my pricing at $50 times three, so I'm going to charge them $150 for a website. We both know that it should be more than that. right? So time based pricing is also not all that good.
Profit Planning
My favorite strategy when you guys are figuring out your pricing is part of profit planning. You're in business to make money. I know most of you are very passionate about what you do, and that's extremely important as well, because we don't put any hours in not to make money and in turn benefit ourselves and our families. It's important that you profit plan and this is all part of profit strategies. Let me tell you how to begin to do that.
The first thing that you need to do is you need to know three specific numbers. The first number you need to know is profit. the second is fixed costs, and the third are your variable costs. Let's start from the beginning. Your profit in this equation is going to be the amount of money that you need to bring into your home out of your business.
After everything is said and done, you brought in your revenue, paid all of your expenses, and what is left is going to be profit. It doesn't mean you have to take all of that and put it into your personal household, but you can. So your profit in this equation is going to be how much you realistically need to pay your personal bills - things like your house payment or your rent, your car payment, your health insurance, maybe your medical bills, utilities, home insurance, eating - all those things. You need to know what that number is. I find most entrepreneurs don't have a clue what that profit number is. It is extremely important that you know that number, and that's where budgeting comes in. We're going to pretend we know that profit number.
The second thing listed here is your fixed cost. Fixed costs and business are items that never change (if they do, they go up and down just a little bit). Examples of fixed costs are your office rent, your insurance, your utilities. Month to month, they’re basically the same.
Finally, we have variable cost. Your variable costs are going to be those items that vary depending on if you have sales. Fixed costs are going to be there whether you sell something this month or not, you still have to pay those bills, whereas your variable costs are only going to be there if you have an item that you're selling.
Back to web design as my example for this equation here. If I'm a web designer, maybe I hire an assistant to help me only when I sell a website, so that's going to be a variable cost because I don't pay them unless I have a sale. Maybe you have an item you’re selling - you crochet baby blankets and you only buy yarn for that baby blanket when you get a sale. So that yarn is now a variable cost, depending on how much or how big the blanket is.
To recap, profit is what you need to bring home to pay your personal bills. Fixed costs are going to be things that never change. You're going to have to pay them whether you have sales or not. And then variable costs you're only going to have if you have a sale.
In my example, again, I'm going back I'm a web designer. I have figured out my budget and I know that my business has to profit $3,000 per month for me to pay my personal bills. Now, Uncle Sam always wants to share - you can't get out of paying Uncle Sam. I tell my clients all the time to set aside 30% of profit, not revenue, but actual profit. Remember, just because you don't take it out of the business does not mean it's not profit. Revenue - expenses = profit
30% of the $3000 profit that I made this month is $900. I know that my fixed costs are $1,500 Whether I make a sale or not this month, I know that I have to make the $1500 plus the $3000, plus Uncle Sam wants 900. So I know for this month, I have to make $5,400.
Notice we're going backward, right? We didn't start with the cost and work down. We work from the end and work backward - that's profit planning.
So typically $1,900 is charged for a website and I know for every website that I get a sale for, I use my assistant, and she charges me $50 an hour and I usually use her for two hours for every website. That's a variable cost. I am going to collect $1900 from my client and I'm going to pay my assistant $100. On that website, I'm going to make $1,800.
If you only have one product this is super simple, but most of us don't, we're diversified. We have all kinds of products and services, so that's when it comes a little tricky.
So, I know that one website is going to net me $1,800. I know that I need $5,400 in revenue per month. So we do the math on how much I need divided by the net amount that I'm going to receive for this service. I know now that I need three website sales a month. Super simple, right? That's the first step in this process.
Now that I know exactly how many of this service that I need to produce each month I can then ask myself “Can I do that? Can I actually pull this off? Can I do three websites a month?” If the answer is yes, you’re good to go. But what happens when that number is too high? Or what happens when that number is too low?
When the number is too high, that means maybe my pricing is too low and if my pricing is too low, then I have to do more of them in order to get the amount of money that I need at the end of the month. There's all these different things that you have to take into consideration. If you have to do more and you don't want to raise your price, then you have to think “ I have to hire more assistance, or maybe I need to spend more on advertising to get more people in the door to do these products.”
Then all these calls start coming around, right? Well, the problem happens here when people just don't do their books. This was a simple equation on your pricing but didn't get much more complicated than that. If you want to add and delete and add advertising and add virtual assistants and all these things, you really need to know what's happening in your business finance.
Finances are not fun, they're not sexy at all. So, instead, we spend our time developing new products, we spend our time doing the things that we like to do, networking with clients, doing the work that we enjoy, and we put our finances on the back burner. I see that happening time and time again.
I've been in this business for over 25 years, and it happens year after year after year. Small business owners come to be weeks before taxes are due with books that are a mess, and they beg me to do what I can to finish everything on time. What happens is, yes, we do their books. Yes, they're in compliance. They get their tax return done on time, but most of them either owe money that they should have known about because they could have made changes throughout the year, but they wait too late. Or they realize when we do their taxes that they make no money.
Having those numbers in October of 2022 doesn't help them in 2021, so you really need to be real-time doing your books. You need to be pinned up every week ( at least every month) going in to see what your profit margins are, to see where you're spending your money. I guarantee you if you're not in your books, you'll have money leaks. Money leaks are expensive, it could be subscriptions that you never use. It could be payroll dollars that are way too hot. Okay, lots of things. So I beg you to please do your books on a regular basis!
Final Thoughts
I encourage you, if you are looking for an accountant or a bookkeeper that you vet them - go through and talk to them, ask them all the questions. You want to know how long have they been doing this. You want to ask them if they have done books for your type of business and then you want to mesh with them. I look at a bookkeeper like your doctor, right? You want to be able to sit down with your bookkeeper and just chit chat with them, maybe ask them all the hard questions and be able to take feedback from them, then actually use that feedback to help you in your business. That's what they're there for! They're not there just to throw you a profit and loss every month and say “Here you go, figure it out.” You need a proactive bookkeeper that will help you.
If you would like to talk with us about it here at Calculated Profits, I'd love to talk to you! Set up a consult with me, it doesn’t cost you a dime to sit on a phone call with me just to chit chat about your business. Let's see where your books are and see where I can help you and if you don't jive with me, that's okay. I just encourage you to look for a bookkeeper.
If you can, visit my website and at the very tip-top it has a button to book a consultation and I would love to talk to you about your bookkeeping. Let's get your pricing in order so that 2022 can be your best year yet.
