The difference between succeeding in business or struggling in business translates to whether or not you keep growing your business or end up closing your business.
Surprisingly, something as challenging as starting and operating a successful business is far less complicated than people think. It’s not easy and it’s not for everybody, but those entrepreneurial -minded individuals who are compelled to take their ideas and ambition to the marketplace have an equal opportunity to be successful – if they stay focused on one of the most fundamental elements of business – incisively accurate pricing.
When accurate, the prices you charge for your product(s) or service(s) will naturally generate the profits you need to operate and grow your business. When you’re pricing incorrectly, your company will struggle, and so will you.
It’s a fairly straight forward formula to determine your price.
Costs + profit = sell price
But, before you can correctly solve that equation for your business, you need to know the values of your actual costs and what is really meant by your profit.
So, before you slap a price on your product or service because it’s a price one of your competitor’s charges, take a pause and learn what’s really involved in this critical aspect of business.
The 3 Key Factors involved in Proper Pricing (also known as the difference between success and struggle)
1. Establishing your profit goal
2. Awareness and effective management of expenses
3. Knowing the price your markets will bear
#1. Establishing your profit goal
Your profit has a lot of work to do for you and your business. So, it’s imperative you make sure you establish a level of profit that will enable it to perform its 3 primary functions:
1. Cover the expenses that keep your business running
2. Cover the cost of goods sold. These are the costs incurred by producing your product(s) or delivering your service(s).
3. Cover your salary or wage.
#2. Awareness and Management of Expenses
One of the most common reasons a business doesn’t make a profit is because expenses have gotten out of control. It can happen quickly, which is why it’s so important to stay on top of your bookkeeping.
Well-kept books mean that you can quickly and easily pull together your expenses month-by-month to determine trends and spot any issues before they become major problems. Having this data legible and accessible means that you maintain 20-20 vision on your expenses and ensure that your profit isn’t consumed by unnecessary or inflated expenditures.
#3. Knowing the price your market(s) will bear
The price of whatever it is you’re selling needs to be based on cold, hard facts. Two companies creating the exact same product may have wildly different costs and situations that would dictate completely different prices.
While the price of your product will depend on the costs of your business and your profit goal, your market(s) will only bear so much. If your product or service is comparable to a competitor’s yet you’re charging twice the price without providing any additional value, then you’re unlikely to succeed over the long term.
Knowing your competitive landscape will give you a good basis for verifying whether or not the selling price of your product(s) or service(s) is reasonable. The operative words are competitive landscape – don’t research one competitor and then base your pricing on only that source.
Research as many comparable online and brick and mortar competitors as you can find; that way you’ll have more extensive and varied data upon which to base your pricing and competitive advantages.
Bottom Line:
Your profit is ultimately the main factor in whether you’ll be able to stay in business. For that reason, it’s worth prioritizing the 3 key price-determining factors highlighted in this article; especially since they’re not that difficult to do. In fact, they can become second nature if you break them down into action items in your weekly, monthly and quarterly schedules.
Assessing and re-assessing your profit – both the profit you must make and the profit you desire to make – can be a natural, daily activity when you rely on it as the basis for making all other business decisions.
Re-evaluating your prices is a quick and interesting task that can be done quarterly.
Keeping an eye on your expenses daily and staying on top of your books weekly and monthly will keep you current and organized – not to mention it will help you when assessing a new expense or gaging your profit. Once you get behind on this task, you’ll never find the time to get caught up and all aspects of your business will suffer, not to mention what the stress can do to you personally.
The good news is that bookkeeping is a professional service that can be – and often should be – outsourced. Still Waters Bookkeeping is in business for precisely this reason – to assume the mundane, tedious but oh so critical responsibility of organizing and maintaining accurate, current books.
This singular adjustment – outsourcing your bookkeeping duties – can be one of the most rewarding business decisions you make all year. By relieving yourself of the drudgery of number crunching, you’ll have more time and energy for engaging in the urgent, exciting, creative, and fun stuff – which is why you started your business in the first place, right?