Tips for Entrepreneurs to Set the Right Price
Should Competitors Influence Your Pricing Strategy?
One of the biggest challenges you will face as an entrepreneur is setting the right price. It’s scary because you know more than 90% of your competitors likely will fail – many because they priced their services or products too cheap.
Given this statistic – here’s a question every entrepreneur needs to answer…
- Should I model my pricing after competitors (and risk failing too) or price services based on my costs and the value I provide?
The answer should be simple. Yet… for years I’ve listened to entrepreneurs explain why they feel compelled to either match or beat competitors’ pricing. To me this is nuts now, although I found myself doing the same thing with my first business. Don’t get me wrong. I’m not suggesting you completely discount the competition; but I am telling you ignoring your actual costs should not be part of your business strategy.
Of course there are exceptions to every rule. For instance you might make a business decision to temporarily discount services as part of a marketing strategy. In this case you likely will lose money or break even in the short-term while positioning yourself to make more money in the long-term. But you should make these decisions only after understanding and taking into account your cost of doing business.
Your Competitors’ Customers Hold the Gold
As you put together your initial prices you or someone on your team should always conduct market research to see what competitors are doing. If you can find and learn from the bread crumbs dropped by your competitors’ buyers you will have struck gold.
- What do the offers look like?
- How much value are they providing?
- Do they provide a guarantee?
- What can you offer that they don’t?
Look at their websites. Check out their social platforms. See what their clients are saying in the reviews. If you can figure out what your competitors missed that their clients have asked for or need, you are well on your way to creating an irresistible offer.
What Role Should Prospects & Current Clients Play in My Pricing?
When the rubber meets the road, if you don’t close deals, your business will eventually become a statistic. Many entrepreneurs go through the guilt stage ofÂ “am I charging too much?”Â and the doubt stage ofÂ “will they pay me what I’m worth?”.
I understood how to research competitors but it took me years to figure out how to leverage prospects and existing clients to zero in on my ideal offerings. In my earlier years I spent countless hours behind closed doors wasting time and money trying to frame out perfect offers. The offers never worked exactly like I planned and I almost always found myself going back to the drawing board to adjust them down the road. A huge game changer for me was learning how to involve the buyers early in the process.
Here are three simple questions you could ask aÂ new prospectÂ before you jam your offer down their throat. Of course you should tailor these questions to your personality and specific business.
- What are you trying to accomplish and in what timeframe?
- Do you know what is preventing you from reaching that target?
- How much would it be worth to you if I could help take that out of the equation?
And here is a quick example of three questions to ask aÂ current client.
- I’m always trying to improve the value I provide. Can I ask you a couple questions?
- What could I have done differently that would have helped your reach your target easier and faster?
- How much would that be worth to you?Â (NOTE: This would be a value add)
If you keep your offers simple enough (which I recommend) you can adjust on the fly and optimize once you have this feedback. These minor tweaks often make the difference between closing deals and struggling to stay in business.
I Knew You’d Ask… Isn’t it Easier to Charge By The Hour?
I’m sure you’ve asked yourself,Â “Should I charge by the hour?”.
I prefer to charge by the project or deliverable based on a specific scope. This way I am charging for the value and anticipated result. If you provide a good service and work with the right clients getting results should not be a problem.
In general I don’t recommend charging hourly or publishing hourly rates in most industries; but these costs do need to be calculated internally so you can develop accurate KPI (Key Performance Indicators) and frame out profitable offerings.
Whenever possible I follow my own advice, but I do make an exception when providing litigation support services. That industry dictates an hourly rate structure.
A Quick Word on Guarantees
To create an irresistible offer your goal is to provide what the buyer needs, set your offer apart from competitors, and reduce the risk for the buyer. Providing a great guarantee to put some or all of the risk back on you instead of your client is another piece of the puzzle. A great guarantee provides a big value add so make sure your buyers understand this is part of the package.
So What Does All of This Mean?
Regardless of how you decide to charge it is imperative to know three things about your costs.
- How much does it cost to run your business?
- What is your time (yes, your time) worth?
- Do your offerings align with your KPIs.
I can’t tell you how many times I’ve gotten a blank stare when I asked a new prospect a detailed question about their costs. Once they realized how many business decisions depend on accurate cost information; determining costs quickly became a priority.
I’ve always been a numbers guy; so when I started thinking seriously about consulting it was natural to sit down and list out my overhead costs. Not someone else’s costs – my costs. I spent a solid day researching, calculating, and entering my anticipated costs into an excel spreadsheet. If you are starting from scratch it might take you a little longer. I used the template I had already built for my other company.
For new entrepreneurs the thought of merely listing out the various cost items can prove daunting; much less actually applying realistic budgets… I guess this is why so many business owners choose to skip this step. Instead they resort to “copying” their competitors – and hoping. I will never condone this practice as it is a recipe to either fail or get lucky – not good odds for a business owner.
Getting a Handle on the Money
Your first step is to confirm how much revenue (money in) you will need. If you don’t have the information readily available to fill in the blanks below you have a problem. It means you don’t know your costs. I recommend you drop back before going any further and get a better handle on the money.
- What is your anticipated monthly overhead expense (including paying yourself to cover your bills)? (a) $ __________
- Add any miscellaneous monthly expenses not already included above. (b) $ __________
- Add (a) + (b) to figure out your monthly expenses (c). (a) $ __________ + (b) $ ___________ = (c) $ __________
- What do you need to earn per month to cover expenses (net – cash to pay bills & yourself)? (c) $ __________ / month
- What do you need to earn per year (net)? (c) $ __________ x 12 = (d) $ __________
- How much do you need to set aside this year for quarterly and annual taxes? (e) $ __________
- How much do you want to put away this year to grow your emergency fund? (f) $ __________
- How much do you plan to put away this year for retirement, kids’ college, etc.? (g) $ __________
- What do you need to earn per year (gross)? Add [(d) + (e) + (f) + (g)] = (h) (h) $ ___________ (this is your minimum – or – breakeven)
You’ve now established your breakeven earnings; but it’s important to note this doesn’t include profit. With your current, or projected, business situation this revenue will allow you to pay the bills. You will live week-to-week but will not get ahead. Your next step is to calculate your minimum hourly billing rate to reach this revenue. Once you know the minimum you can start figuring out how to raise the rate or work more efficient; resulting in earning a profit so you start getting ahead.
Calculate Your Hourly Rate
I’ve made some basic assumptions below. Adjust the hours up or down accordingly if this doesn’t fit your business model. Otherwise you’ll use 1,880 hours (i) to calculate your rate.
- 52 weeks x 40 hours = 2,080 hours
- Assume 10 days for holidays and miscellaneous personal days =Â 80 hours
- Assume 15 days for vacation (adjust up/down as applicable)Â = 120 hours
- 2,080 hours – 80 hours – 120 hours = 1,880 hours (i) = 47 weeks (ii)
As an entrepreneur it is normal to spend 30, 40, 50, even 90% of the time on non-revenue driving tasks. You are not alone. If you think you will get paid for every minute of your time – think again. In the course of a week you will spend time handling corporate duties, reading emails, building backends, providing value, directing clerical staff, paying bills, etc. This time drain can be corrected and delegated through strategic action steps but for now you should develop a rate based on your current situation.
When you improve you won’t lower your rates. Instead you will make more money with less effort.
- How much time per week do you currently spend on non-revenue driving tasks? (j) _________ hours/week
- Multiply your answer (j) by (ii) 47 weeks => (j) _________ hours/week x 47 weeks = (k) _________ hours
- Subtract your answer (k) from 1,880 (j) => 1,880 hours – (k) _________ hours = (l) __________ hours
- Your minimum hourly rate should be…. (h) $ __________ / (l) _______ hours = $_______/hour
Are You Charging the Right Price?
Well… Are you charging enough? Are you even covering costs?
If not – your next step is figuring out how to add value and raise prices and/or cut expenses.
Is your head spinning yet? That’s ok. Trust the process andÂ THE 10 FACTORÂ will help simplify your journey to success. Remember, most entrepreneurs undervalue themselves and their services. Until you get everything down on paper you canâ€™t start figuring out how to leverage your money and optimize. Donâ€™t give up now.
You are just getting started!
To learn more visit:Â the10factor.com
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