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Setting your price
The only way to take control of your life, raise your standard of living and move beyond merely surviving is to create your own unique product or service that you offer to increasing numbers of people in exchange for the things of value that you desire. This simple formula applies to countries as well as people. A self-sufficient economy has its own products or services of value to export to the world. Similarly, a self-sufficient individual has something of value to exchange in the global marketplace. That thing of value is based on your natural talent, skill, or interest—in other words, your passion!
Setting Your Price for Profit and Prosperity
Whether your passion is a product or a service, you’ll eventually need to decide how much you’re going to charge people. This is often a major challenge for new entrepreneurs. Issues of self-worth often play a detrimental role in how much money people allow themselves to earn. Ultimately, the price that people will pay for your product will depend upon the value that you place on it, and on your ability to communicate that value. At the same time, there are certain factors that will determine what you can and will have to charge in order to make a profit.
From a business perspective, your price must accomplish several things. Not only must you charge enough to cover your expenses and maximize your profits, but that price can’t be so high that it will discourage sales. To help you set your price for profit and prosperity, here are four things to consider along with the right questions to ask.
1. The market
What are others in your industry charging for similar products and services? Are you entering an industry in which retail prices have already been set by tradition? If so, you can set your price using “competitive pricing.”
2. The demand
Is your product a currently popular, or hard-to-find item that people are willing to pay a premium for? Will you or are you selling so much of your product that you can create or purchase your inventory at a lower unit cost? If so, you can set your price using “demand pricing.” Set your prices higher if people are willing to pay a premium. Set prices lower (to beat the competition) if you can purchase at lower unit cost.
3. The cost to you
What does it cost you to purchase or create your product? If you know this, you can simply add a percentage, or use a multiplier to arrive at the cost to the consumer. This method is called “markup pricing.”
4. The perceived value
Is your company’s image such that consumers will pay more for your product than they would for a competitor’s? Is your packaging, reputation, customer service, guarantee or overall quality so special that customers expect to pay more? Is your product one-of-a-kind? How much you can charge using perceived value is unlimited. It’s simply a matter of how much value you can establish in the minds of consumers.
There are certain situations in which you might intentionally set the price of your product or service at less than optimum. When you “upsell”, for example, you encourage sales by offering a lower-priced introductory product, with the intention of selling a higher-priced follow-up product. Also, you might set your prices lower simply to win customers from your competition, and to announce to the world that you have arrived.
Remember, setting your price is not an exercise in random number generation. In other words, you shouldn’t simply pull a number out of thin air (or some other place), and attach it to your product and hope it will sell. There are concrete considerations (margins, markup, etc.) you must take into account in order to make a profit.
Tips on Pricing a Service
Pricing a service presents a unique challenge. The services you provide through your passion can be in the form of consulting sessions, workshops, personal appearances, catering, etc. As a result, you have many options of how to present the cost of your service to your clients. You may charge people by the hour, by the day, by participant (as for a workshop), by customer usage of your service, or by the project. You may also charge a flat fee per job, or charge a retainer fee.
In each instance, however, what you are doing is placing a value on your time. Therefore, it is essential to know how many hours you actually spend in providing the service regardless of how you present your final price to your client. Once determined, you can multiply by your hourly rate to determine the amount you should charge.
Here’s one way to determine your hourly rate. It’s based simply on how much money you want to make in a given year.
Step 1. Determine how much you wish to earn each year. Let’s assume it costs
$2,000 to operate your business each month
$4,000 in family expenses per month
$1,000 miscellaneous expenses each month
$7,000, Therefore, is the total you wish to earn each month
$84,000 = Total you wish to earn for the year ($7,000/month x 12 months)
Step 2. How many hours you will actually work
The next step is to determine how many hours you will actually be billing your customers. Taking an average of industry standards, we’ll use 5 hours per day. That translates to 25 hours per week, or 1250 hours per year.
$84,000 income desired/1,250 billable hours = $67.2 per hour
Therefore, if a customer requests a session or a project that will require 3 hours of your time, you now know you’ll need to charge at least 3 x $67.2=$201.60. I say at least because you may incur other costs in performing the task. There may be supplies, phone costs, fax charges, postage, mileage, tolls, gas, parking and other hidden costs that you’ll need to bill to your client.
If you are not doing the work yourself, you can charge based on what you need to pay your employees or consultants or subcontractors. Take into account all your expenses such as materials, rent, equipment, and supplies, and include them when you markup your price for profit.
In a future article, we’ll explore some concrete examples of pricing! Stay tuned.
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Until next week, remember, success is a journey, not a destination!--Walt
(Walt F.J. Goodridge is author of 12 books including Turn Your Passion Into Profit. Walt offers coaching and workshops to help people pursue and profit from their passions. Originally from the island of Jamaica, Walt has grown several successful businesses in the US, and now makes his home here in Saipan. To learn more about the Saipanpreneur Project and Walt’s philosophy and formula visit www.saipanpreneur.com and www.passionprofit.com. Send article suggestions, entrepreneur nominations and feedback about this article to firstname.lastname@example.org.)
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