Monthly Archives: February 2016

Pricing products is not just about what other companies are selling them for

Its about what it is costing me to get them. To a point, other’s prices don’t reflect what is going on in MY business. About 95% of what we sell is products. We will look at competitors prices but only as a local guide to what things cost. We do not base our prices strictly on what other companies sell the same product for. For example we have a couple of local competitors who sell boots but they don’t have the depth and breadth of product we have so they likely get fewer discounts from their vendor due to their low volume. We also look at the big box store’s prices. They may have the same stock numbers but they do not always carry a full range of sizes nor, for example, will they order a single pair of boots, for a customer when they are out of that size. We will order a single item of anything if it’s available and it’s a company we deal with. Academy or Wal-Mart or Cabella’s (as examples) will not do that. (If it’s something we do not carry there are conditions for return.) So comparing what we sell to a limited selection that others carry is not a true comparison.

For you, providing a service, you need to figure out what it’s costing YOU to provide that service. Of course after this you can see where you stand among your competition. If it costs you $100 to provide a service and it costs your nearest competitor $80 and you try to arbitrarily meet your competition, you in the hole before you get started. Possibly there would be ways to reduce your cost and still provide quality work or maybe your competitor is not providing the same level of quality, guarantee, etc.

Our prices include the actual cost of the item, including shipping. We also have to factor in
* rent
* profit margin
* electricity/water/phones
* insurance, workman’s comp
* supplies (paper, ink pens, ink for computers, etc.)
* office equipment (computers, copiers, cash registers, adding machines, etc.)
* payroll for ourselves and all employees
* maintenance and repairs to the building
* fixtures & furniture
* advertising
* vehicle fuel/insurance/maintenance
* etc, etc

There is a lot more to it than it appears on the surface. You probably have some of the same costs even though you are selling a service. Make sure you are including all theses costs or you are losing money on every ticket because even service oriented businesses have almost all these costs. We are adamant that we will not give stuff away. If we cannot sell an item at a profit, we will not sell it in our store. By then, if we are not making a profit, we are giving it away.

>>I think we need to raise rates, but we may lose clients because of it and that makes us really nervous.<< Also think about it this way. If your rates are really low compared to your competition, potential customers may think, “How great can their finished product/service be if they are that cheap?” If you raise your prices you may lose customers. However you may gain some as well. If you decide to increase prices, it is a good idea to give your current customers a head’s up, as I am sure you are aware. It would be nice to send a cover letter with a “new fee schedule” by mail with about 30-60 day’s notice. For new customers you could go ahead and start charging the new fee schedule right away. One more thing. In our case, dh and I do not work for free at our company. We each draw a monthly salary that is not slave wages but not a king’s ransom either. It is enough to have a reasonable lifestyle. We must live on the frugal side and do not drink champagne and eat caviar every night after work. LOL Really, we do not eat or drink either one! Believe me we have met people over the years who did not allow for a salary when running their own company. It gets me how some people think they are earning a living when they don’t take a salary from their business and they wonder why they have to keep robbing Peter to pay Paul. There is a couple in our Bible study who are about 10-15 years older than us. They used to be self employed, he was an electrician and she helped by answering the phone, etc. She remarked one time how they never drew a salary because “they couldn’t afford to”. How can you afford NOT to draw a salary? LOL When I started my coaster business in December 2012, my price was lower than what I charge now. I realized it was too low when I looked online & saw what others were selling at craft shows & compared quality. Also when I gave a set as a Christmas gift and the price was really too low, the recipient said, “Oh, these would sell in _____(a local upscale gift store) for $25!” My price was about 1/2 that, so I realized almost right way that my prices were too low. Since then I have gone up. I think I have found that “spot” that Kathryn talked about. My prices on my website ($30) include shipping but locals pay only $20 per set because I don’t have to worry about shipping, packaging, etc. When I made a price increase I first went to $16 for a while then went to $20 and have remained there since. Shay, I know some of this, maybe all of it, does not apply to you. And it seems I’ve chased some rabbits. However, I hope it helps.

I agree that pricing services is a whole lot more nebulous than pricing actual tangible products

This might sound odd, but are there other specialty groups for your type of business, with members from various areas, whom you could ask without having their answer influenced by competition? For instance, I’m on a lot of farming lists where we talk back and forth about pricing for this-or-that farm product. We can be very honest with each other because we’re not in each other’s local markets. So for instance I can post a question to one of the groups about how they do their pricing for tomatoes amongst their various market outlets, and I’ll get a bunch of answers back from folks growing tomatoes all over the country. It might take some work to find a similar professional group within your business’s specialty, but I would think such a group would be a goldmine of info.

I do think it’s safe to assume you’ll lose some customers if you raise prices. The lower the raise, the less they’ll notice and the fewer you’ll lose. One way to do this is to figure out where you are vs where you want to be, and then figure out a way to get there incrementally. For instance, for our eggs we went from 5% below cost, to 10% above cost, all at once. The price change was dramatic – $3/doz to $5/dozen. I think it’s paramount that we got above break-even as quickly as possible, but we could have gone to say 2% over cost in 2013, then 4% over cost in 2014, then 7% over cost in 2015, then “land” on 10% over cost in 2016. Or some other kind of incrementation. If you raise prices slowly, it won’t hurt as much. And if you raise them say every year in January, most folks will understand that and start to count on it. You may have a few hiccups along the way but no one can stay at the same price forever. I’m willing to bet most of your customers are thinking “hmmm, they haven’t raised prices in a long time, wonder when they’re going to wake up and realize they need to?” So you might have less pushback than you expect, particularly if you do it slowly. Just think “lobster in the pot” and that goes a long way towards explaining how pricing works from day to day.