Episode Transcript
[00:00:00] Welcome to another episode of Financial Snickens. I'm your host, Alisa McCabe. And today we're going to be talking about pricing strategies and how to price your services. So did you ever review your profit and loss and you saw a loss and you were super frustrated by it? So once you've done another look over and you know, trying to find out why there's one place that entrepreneurs sometimes forget to look, and that is your pricing.
So what, what happens is we don't think of it. We think, Oh, if we do more sales, we'll be profitable. But if you haven't priced your services correctly, no amount of sales. is going to make you profitable. Determining the right pricing can be very challenging. And there are several strategies that entrepreneurs can employ to ensure that you [00:01:00] are charging appropriately and generating sufficient profit.
But the most important part of this process is to make sure that you are making money. Look, we started our businesses because we love what we do, but we're also doing it. to make a profit. So I'm going to tell you how we're going to start this, these guidelines. You're going to start with cost based pricing, and then you're going to look at your profit margin as a guide.
And then we're going to talk about value based pricing. So what you want to do is you want to calculate all the costs associated with Your services, including your direct costs, which would be any materials that you use, any the labor that you have, and then you wanna look at your indirect costs, which would be like your overhead, your rent, administrative expenses.
And then you're gonna add in what's your desired profit margin that covers your business growth risks. Or you know, [00:02:00] what you wanna have is a return on your investment. So this method ensures that. All your costs are covered and it provides a profit. My only warning on this, it's a great place to start.
I'm not saying that you're done once you're, once you do this, but this way, at least, you know, everything over that will at least cover all your costs. Don't forget your hidden costs. So a lot of times entrepreneurs forget about things like marketing or customer support, or if you know that the service that you provide needs.
ongoing improvements. Something that we use all the time is apps and the apps increase their prices every year. So we have to account for that when we provide our services. So the next thing you're going to do is you're going to look
at your profit margin. So when you aim for a profit margin that follows the businesses, the [00:03:00] industry, you are going to end up in a different Um, place depending on what your industry is.
So like software subscriptions, your, uh, profit margin can be as high as 50%. Supermarkets are between one and 2 percent as are liquor stores. Service based businesses are typically between 20 and 30%. So how do you get to this profit margin number? Run a profit and loss by percent of income. This report will show you what your profit margin is on a percentage basis.
So it will take all your costs and it will allocate them as a percentage of your sales. And it shows you the bottom number, your profit of how much is left. So, if you're doing great in a service based industry, it's about 20%. That's great. You're pricing your product correctly, but as I said, many entrepreneurs [00:04:00] look at their profit and loss and they're very frustrated because It's a negative number.
So let's get you to some positive numbers. You can decide what you want for the profit margin to be. Set a goal, make it 20%, 30%, whatever you want it to be. And then we can work from there. So we're going to start with the cost base and we're going to look at net profit margin. And now we're going to talk about value based pricing.
So. In the first exercise, you went through and looked at how much everything cost, so you knew what your basic price has to be to cover everything and to give yourself a profit. And the next one we talked about, like, you know, how much of a profit do you want to get and where does, and how to measure that.
Now we're going to talk about value based pricing. So value based pricing is in addition to those. So you're going to assess the value of your services that you bring to your clients. So consider the benefits that you bring to your clients, the outcome, the competitive [00:05:00] advantages that your company brings to your clients.
Are you experts in the industry? What difference will it make to your client? and their profit margin when they hire you. And are you providing something unique? So I love, I love the example that someone had told me about. They said, the perfect example is art. If you went and just did it on cost basis, you would say, Oh, I need paint.
And it took me so many hours to do this. And it was the canvas that wouldn't give you much of, of a price for art. Art is, you know, valued. the eye of the beholder. It really is, um, how much the perceived value is of that piece of art.
And that is on the person who's receiving it. We have all been in a museum and seen that 10 by 10 piece of canvas that's painted blue.
And [00:06:00] somebody looks at that and said, Oh, that's amazing. And other people look at it and say, Huh, I'm not really sure what that is, but it's all perceived on the value that your services bring. Um, another example of. You know, when it's a situation where you can do value pricing is when you're an expert in the industry or you have a proven track record of success.
Your knowledge comes from years and years of experience and should not be set at an hourly rate that doesn't cover all the education, all the training you've done, but value based pricing would cover that. It is the collective knowledge that you have done, the blood, sweat, and tears that you have put into your expertise.
So set your prices based on the perceived value to the client rather than just the cost of production of your services. And this approach can result in higher prices for you. And [00:07:00] it can also help your clients with achieving loyalty and a higher client satisfaction. Now, I told you the three basic steps that anybody can take doing pricing for your services.
The last step is a step I say for everything. Review it regularly. You may need to adjust your pricing to account for changes in costs, market conditions, or the perceived value of your services. So you can set a standard at the beginning when you engage with your clients and let them know that your prices are going to increase on a regular basis.
You can decide what that regular increase is. Is it going to be yearly? Is it going to be twice a year? Is it whenever it's going to be? Let them know and let them know maybe a range of what it's going to be. So, I have seen, um, some of, uh, clients and colleagues will say [00:08:00] in their contract that it will be Either 4 percent or the rate of, or the rate of inflation.
Now some years inflation has been zero. So having that and saying that it's going to be the higher of the two, that you will always get that 4 percent increase even in years when inflation is zero. So but you have to be okay with that too. And your clients need to be okay with that. You can also link an increase of your services to the success of your client.
So for example, if their sales increased 25%, our fees will increase 2. 5%. So it's something that you can do to regularly review what your pricing is and also talk to your clients about it ahead of time. So remember that the right pricing
strategy. is clearly based on industry, your target market, and unique value proposition that your services bring.
It's essential [00:09:00] to strike a balance between covering costs, staying competitive, and providing value to your clients. Regularly assessing your pricing strategy will ensure that it aligns with your business goals. And what's happening in the market. If you want to talk more about pricing strategy, head over to my website, first steps, financial.
com and click on the let's chat button and we can talk about pricing strategy and what can work best for you.
