Pricing for profit

Much as I go on about happiness and work life balance, if you don’t make a profit, you don’t have a business. Every business needs to focus on making a profit, otherwise they will go under. So I’d like to share a couple of essentials for pricing for profit.

1. Know your numbers

It is shocking, though unfortunately not surprising to me anymore, how often business owners don’t know their numbers. You need to be absolutely clear about your costs, your overheads, your wages, and especially your taxes. Know every single number that goes into running your business and what they add up to, off by heart.

And remember, if this is an area that has your head spinning, there is help out there! Speak to your accountant, or get a (part-time) Financial Director involved. There is no shame in asking for help, but burying your head in the sand is never the way to go.

2. Know how much you need and want to earn

Note that those are two different numbers. How much do you need to earn to survive? That means having somewhere to live, paying your bills, and putting food on the table. Next, how much do you want to earn? Do you want to go on holiday, put the kids in private school, drive a nice car, retire early, hire help around in the house? Whatever else you want, find out the real cost of it.

A surprising number of people don’t do this exercise. Some people work to some random number and just cross their fingers they’ll be able to pay the bills. Even more just pick a big random number (which is probably much too high) and work themselves to the bone to achieve this unachievable number.

Add it all up and then work out how much money you need to earn. Again, don’t forget to plan for taxes!

3. Know what you can charge for

Many people’s mindsets in the service industry are focussed on an hourly rate. People tend to think about their workday, say eight hours, and then work out how much they want to charge from there. But most people can’t charge for every hour of their whole workday. For example, I’m a coach, so realistically I have a maximum of four chargeable hours a day. If I just multiplied a low hourly rate by the hours in a day I work for (rather than the hours I can charge for) I’d be in trouble pretty quickly.

4. Charge the right price

Coming back to knowing your numbers, your costs are the first thing that dictates your price. Your price must cover all your costs. If you think that sounds silly, I’ve worked with so many people who thought their price covered their costs and it didn’t because they didn’t know their numbers. They hadn’t included shipping costs or the electricity bill or taxes or their own wages!

Once you’re 100% sure your price is covering your costs (all of them) you can think about making a profit. This isn’t about adding a random number on top of your costs. There’s a concept called perceived value. I’ve talked about this in previous posts. It’s why an iPhone can be sold for 3 or 4 (or 100!) times what it actually costs. The right price is determined by the value you communicate to the customer. If you communicate more value, you can charge more.

5. Charge more

Most of the people I work with should be charging more (even after they’ve done the exercises above). There are a couple of ways that you can do that.

First, make sure you’re crystal clear in showing why your product or service is so much better than anybody else. Don’t just copy another business, improve on their offering.  

You might also consider a “premium” option. It’s well known that 20% of people are prepared to pay a premium price for a premium product. What’s the absolute best version of what you offer? How can you make it a unique experience that is worth so much more than the individual elements?

Another way to charge more is to create packages, whereby you add things (not necessarily even your own products) to create a higher-priced product. Can you add a maintenance contract or some books?

Or you can offer monthly memberships. Someone might otherwise have only bought from you once, but if there is a membership available you are able to get more out of them. They also become more loyal customers and are more likely to recommend you to others, which is another way to make more profit.

Obviously all of these things need to offer great value to your customers. You can’t charge a lot of money for a rubbish product or service. But people are willing to pay for good quality, so think of various ways that you can offer that.

I hope that I’ve given you some ideas on how to improve your offering so that you’re pricing for profit and not just for more work.

For more on this, you can also read an earlier blog post: How to make more Profit.