One of the key aspects of business planning is price setting. This can be a challenge, especially in the current recession. Sometimes we under-value the price of our products or services to compete with other businesses. However, if you focus on quality over quantity, and focus on what is unique or better about YOUR business, you can properly charge what you are worth.
Remember, that there is also a perception in business that cheap is also rubbish! For example, if a marketing specialist charges £70.00 an hour, it implies that they are very well trained and experienced - they must know what they are doing to charge that much! If they were to charge just £10.00 an hour, you may think hmmmm....... perhaps they are just starting out, or don't really know what they are doing!
Three Approaches to Setting your Price
There are three main approaches or considerations when setting your price...
1. Cost Based - Consider the cost of the product and mark it up to make a profit.
2. Customer Based - How much is your customer willing to pay?
3. Competitor Based - Keeping prices in line with, or lower than competitors
In reality, the ideal and practical approach is to consider all of these factors when asking yourself 'What should I charge?'
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What Should I Charge? Stock Based Business
I heard a story from another business contact about a guy who was enthusiastic to start his sports equipment business. Instead of planning and doing his costings, he went out and spent £5000.00 on stock. However, when he worked out the price he needed to charge, he realised that he was going to have to market his product at almost double the price of high street chain Sports Direct, and that was just to cover costs!
The general rule for retail mark up is 2.4%. So you have to at least double the original cost of the item, or you could even end up losing money after paying staff and overheads. Here's an example:
Cost $10.00 X 2.4% = Retail Price $24.00
Remember, with a stock based business, what you 'take' is not what you 'make'. There is a difference between turnover and profit! Sounds simple, but people can get carried away basing finances on sales, and not looking at whether or not any profit is made.
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What Should I Charge? Hourly Rate
When calculating your hourly rate, you need to make sure that your factor in the time that you are not earning, including meetings, paperwork, training and holidays. Then, if you are a fully trained expert in the area, you need to ensure that you price accordingly to this, and factor in any ongoing training, premises and running costs. Investigate what other services charge in the area, and compare your credentials and qualifications to theirs.
When I first started out as a social media consultant, I figured that £25.00 an hour would be a reasonable rate. If I taught for 20 hours a week, that would give me £500.00 a week and £2000.00 a month. Plenty to live on. However, due to the meetings to close a deal with clients and day to day running of the business, I only ended up teaching and consulting for 10 hours a week, which halved that monthly income to £1000.00 a month. After office, website and freelance costs, this almost halved again.
Needless to say I ended up realising that I needed to double my rate, so I now charge £50.00 per hour for social media consultancy. It felt a little strange increasing the hourly rate, and I had to consider the reaction of my current clients. So I timed this with the award of my BTEC in Social Media for Business, which helped me to justify the price increase.
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Costs you Shouldn't Forget
When doing your costings for both service and stock based businesses, don't forget to factor in the following...
- Transport Costs other than normal trips to work
- Office cost or a proportion of the property cost if you use a home office
- Stationery (printer paper, ink, pens, post it notes, you know the score!)
- Original cost of stock
- Training and certification
- Staff (either freelancers or employees)
- Business meetings (room rent and coffee or lunch for clients)
- Resources such as computers, printers and computer software
- Website Cost
- Paypal or Payment Gateway costs
Don't work for Free!
Time is money in business - so don't work for free. Some clients push people to do free proposals and marketing plans in order to secure business. But if you do something for free, not only are you doing yourself out of pocket, you are also implying that you are desperate for the work. After all, if you were booked up all of the time, you would just say that you didn't have time to do free proposals when you have paying clients!
Sometimes, it may be a good idea to offer a free 15 minute initial phone call to verbally show what you can do. Introducing a few new ideas could be the deal breaker, and make a client go with you rather than someone else.
Book Keeping and Accounts
The best advice I was given when I started out in business was to keep my books and accounts up to date as you go along. If you let it pile up, organizing your accounts can be very difficult!