Small business is an emotional rollercoaster, especially when you’re starting out. Your day-to-day work life can change on a whim. One day your calendar is booked out, the next you’re looking for something to do.
1. Take the emotion out of the decision
Small business is an emotional rollercoaster, especially when you’re starting out.
Your day-to-day work life can change on a whim. One day your calendar is booked out, the next you’re looking for something to do.
When business is quiet, the natural response is to do anything to get clients through the door. For many, that means moving your prices up and down depending on your current mental state.
Sadly, desperation can lead to rushed or poor decisions.
We hear stories from business owners who underprice jobs just to generate trade, only to have their time taken up by work that isn’t making them a worthwhile profit.
During the first couple of years, simply trying to survive is the primary focus for a lot of businesses. Breaking your pricing down to a logical level and staying patient will make sure you remain profitable and have enough cash flow to grow your business.
If your product or service offers good value, trust that you will build customer loyalty to your brand over time.
2. Write down your pricing objectives
Before formulating your pricing methodology, you need to know what are the main goals you hope to achieve.
Whilst pricing may seem simple on the surface, there is a lot more that should go into your decision making.
Beyond just wanting to make a profit, these are some of the most common objectives that influence pricing:
Remaining competitive against the competition
Positioning the business at the higher or lower end of the market
Increasing sales and growing a customer base
Use your business plan to align your pricing goals with the direction of your business.
Defining your specific objectives will give you a strong indication of what type of pricing strategy you need to implement.
3. Know your pricing strategy well
Formulating your prices is one thing but preparing your pricing strategy is another.
Having an effective pricing strategy will make it easier to adapt to market changes and communicate your justifications to the customer.
The three main pricing strategies that small businesses use are:
Value-based pricing - Basing your pricing off the perceived value of your product and what the market is willing to pay for it. This means charging extra for things like experience, reputation or quality of service, rather than just the costs associated with producing your product or service.
Competitive-based pricing - Looking at what your competition charges and pricing yourself accordingly. This can be quick and effective to start out your pricing but may be difficult to sustain as a long-term strategy.
Cost-based pricing - Involves adding up all the costs associated with producing a product or service and then adding on the profit that would make the process worthwhile. This method can be difficult for businesses who offer services where costs can be harder to quantify.
The strategy that is best suited for your business will depend on your industry and your business objectives.
Don’t feel too much pressure to get it perfect right away. You will always be able to make changes as you and your business grow.
4. Use cost-plus pricing as a review mechanism
Over time, your costs and expenses will change as your business grows and the market evolves. This can slowly hurt your profit margins if your pricing isn’t updated accordingly.
Using the cost-plus method can be a great way to avoid nasty surprises at tax time.
This involves adding up all the total costs associated with producing your product or service on a quarterly to biannual basis. From here you can identify whether your revenue corresponds to your growing costs and whether the profit still justifies the effort.
If your customer base is growing but your profits are not, then it may be time to consider repricing.
Identifying problems early on is always the most effective way of running a business.
5. Monitor and reprice when necessary
Do your best not to get complacent once your pricing strategy is in place. The most successful businesses analyse their revenue, costs, expenses and competition on an ongoing basis and make appropriate adjustments when necessary.
There is no golden rule when it comes to pricing. It’s perfectly reasonable for small businesses to implement a simpler pricing structures initially with the aim to revise them later on.
Reassess how your current pricing strategy is meeting your business objectives and whether you could be better positioned to meet these goals.
Am I losing clients? Am I losing cashflow? Are my costs going up? Are my customers happy?
Answering these kind of questions regularly will give you the best chance to make informed pricing decisions.
For additional help, we’ve outlined a five-step guide for repricing your business.
To hear about the different pricing styles and our business journey, check out our podcast episode below or subscribe to us on your podcast app.
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Elephant Advisory is an accounting and mortgage broking firm based in Melbourne, with a successful history of helping our clients achieve their goals. With a little help from us, you'll be prepared to make the right decisions for your business or property journey, avoiding many of the potential mistakes along the way.