David writes for Small Business Heroes
Deciding on what to charge a customer can be a dilemma for a small business when they are struggling to balance what they think the market can bear with what they need to turn a profit. David Johnson is Head of Programme at Cause4, and advises small businesses and charities on strategies for growth. He feels that the real magic is in the margins.
Getting the pricing right isn’t easy. Whilst on paper you can plot out your operating costs, calculate a suitable profit and decide that’s what you want to charge for your products or services, you could find yourself struggling if your competition is undercutting you or the clients you’ve earmarked just can’t justify the expense. You need to understand the margins in which you’re operating. Market research isn’t just something you do when drafting your first business plan, it should be an ongoing process. It’s important to keep an eye on what your competition is charging and the specifics of how they price their services. You need to make sure you are comparable. Do a mystery shop before you go to market and build in the time to revisit your findings as the years go by.
You don’t have to offer a like-for-like product or service to justify your expense. Having a social purpose as part of your strategy can appeal to customers who share your vision and those who need to show their own stakeholders that the suppliers they are working with fit their values. Founder of TOMS, Blake Mycoskie, has built a company that matches every pair of shoes purchased with a pair of new shoes given to a child in need. TOMS aren’t the cheapest canvas shoes on the market but they’re certainly popular and their customers are prepared to pay a few extra quid for the feel-good factor that they’re making a difference.
Think about your advantages over your competition. Are these something your customers can experience? Will they pay more because of something different you’re bringing to the market? Sometimes bundling items can give the impression of adding value and help you differentiate from other businesses in your field. Offering consultancy and training courses on top of your service product is one way to increase customer spend and build a more long-term relationship. Alternatively you could think about partnering with businesses with similar ethos to deliver a joint offer.
It’s important to consider where you are in the life of your business. You may initially want to use more competitive pricing to gain advocates for your work or build a market share. You’ve also always got the option of staggered pricing where your prospective clients have varying levels of turnover. And, if you find that you don’t win a client in a competitive tender, ask for feedback. The more information you can get at this stage means you are able to make adjustments and correct for next time.
Pricing shouldn’t be a race to the bottom and it is ok to make the decision that you can’t afford to work with as to take them on would lose you money. Be thorough with your assessment of how much it’s going to cost to deliver this business, there may be hidden costs, such as additional training, increased insurance premiums or the need to bring in extra manpower than could turn your celebrations over a new business contract into a cross you have to bear.
You’ll need to review your pricing strategy regularly to incorporate changing costs, market demands and competition. And the old adage: “revenue is vanity, profit is sanity, cash flow is reality” should work like a mantra for any growing business. Having a client that signs up to a big-ticket service or item only to prove unreliable about paying their invoices can cause you heartache, putting a stress on your ability to deliver to them and to your other clients.
You want to offer a service or product that your client thinks has value. But value is a subjective term. Get to know your customers and you’ll better understand their motivations for making a purchase. How is your product or service impacting their daily lives, their own businesses, their health and wellbeing? A customer understands that you will be incurring costs to deliver but their decision to buy is based on their own needs not your business operation.
Finally, it’s worth thinking about offering some options. Showing customers that there’s a ‘way in’ by offering a cost-effective paired-down product or service can secure their interest. Once they get to know you and the quality of your work they might be happy to pay more for more features.
Many SMEs, especially, start-ups struggle with their pricing strategy and run out of money because they just haven’t got the numbers right. Pricing is the difference between success and failure so take the time to do your research and stay aware of what you’re spending versus what you’re charging. It’s not just about the monetary value, it’s about the value your customers feel they are getting, the experience of working with you. Know your value and charge for it.
Read the original article here.