PRICING SERVICES AND PRODUCTS
by Alan J. Zell, Ambassador of Selling

When someone starts out in business and they set about to do a business plan, one of the tasks is to estimate sales monthly for the first year, quarterly for the second year and annually for the third year. It's guess work at best and frightening to have to come up with. For one thing, it means putting these numbers down on paper. “What happens IF I don't reach those figures . . . will people think I made a foolish, stupid or BIG mistake” “How will I look in others' eyes and, for that matter, in my own?” rumbling around in one's head.

The question people ask when they seek advice for starting their business is, “How do I figure what I should charge or price my work?” Without knowing that, how can one estimate what sales might be? One can't. One could total all their expenses and see how much income the business has to generate in order to cover those costs but that does not give how many units or services one has to do to reach those figures.

To come up with some general prices/fees or price/fee ranges, there are three questions to ask oneself:

What will customers/clients be willing to pay for my products/services that will allow me/us to make a profit?

Can I/we do it for that price and make a profit?

If not, what will I/we have to do in order to raise my price/fee that customers/clients will pay so that I can make a profit?

The questions are in this order because, first off, what customers/clients will pay determines if work gets sold. Remember, they will not pay the price/fee if they do not think the product/service is of the quality and/or value they had in mind or that they believe others will agree with.

All businesses have two basic functions - operations and sales & marketing. Businesses with several people (management and staff) can allocate these functions. Sole Proprietorships, Partnerships and businesses with fewer than three people find that they are involved in both functions.

The attitude small businesses have to take is that they are running, so to speak, two businesses. One is a “production” business - making the products/services the business has to sell. The other is, as above, a sales and marketing business. When they are making, they are not out selling; when they are out selling, they are not making. In some ways, one might say that the production business is “wholesaling” its output to the marketing business. Both “businesses” have to make a profit if the primary business is to succeed. Hence, coming up with a price/figure is what follows.

There is a guideline or “rule of thumb” that one can use to come up with an estimated minimum price/fee. It is:

          Time (hands-on) + materials (raw) x 6-1/2 = minimum retail price/fee.

There are, of course, many caveats to this guideline. For example, if one is using finished products in their work, they cannot mark them up 6.5 times. For these items, 2X to 4X may be the right amount. The reason for this other than making the end price TOO high is that the maker has figured their profit in them.

Interesting, another way of using this guideline is to come up with a selling price/fee and then dividing it by 6.5 to see if it can be done for that figure. This is called “pricing backwards.”

Here is how this guideline might look using $100.00 as the price of the product/service. If one divides $100.00 by 6.5, the answer is $15.38. While this may look like a big jump - from $15.38 to $100.00. It isn't. Here is how one arrives at these figures:

To make the arithmetic easy, 6.5 X $15.00 = $97.50 with $2.50 to spare = $100.00. Using this ratio does not mean that customers/clients will buy the work at that figure. So, if will only pay less, doing the work may not be profitable.

* If this end of the business is hiring salespeople, agents, representatives, they need to be paid.

** This is added-in to costs because one of the things many businesses do not budget for relate to having the proper marketing materials, especially those printed materials needed for customers/clients to use in their environment as they go to discuss and make their buying decision. The guideline for these materials is, “always make all printed material for customers/client to use when the seller is not there to influence the conversation.”.

Not all products/services need to be figured the same way as some product/services may be used as a "loss leader" in order to get the sale. To offset these loss leaders, one needs to have products/services that can carry a multiple of 8 or 10 or more so that average ratio is at least 6.5

With a list of prices/fees one now has some basis to begin to forecast sales. The variable is, of course, how many of each will one sell during a given time? One can only guess at what this will be. But guess one must do.

To ease the fear of making a mistake, remember that a business plan is a living document. Not doing what was estimated does not mean that one did not do well. It means that, possibly, one overestimated what might happen. Doing better than one estimated does not mean that one did well. It may have meant that the estimates were not bold enough.

A business plans is, some say, wrong the minute you write it. So, why go to all this trouble? The answer is that a business plan is a "living document" which, like our lives, changes from day to day, week to week, month to month, year to year. Having these estimates sets a benchmark so that as one sees where things are deviating from what was estimated changes can be made to react to the marketplace.

This article was written to help you and your business. If you believe some of these articles will be helpful to your business, please e-mail me your comments on how you will apply them. ajz

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Copyright © 2000-2007 Alan J. Zell, Ambassador of Selling, Portland, OR. All rights reserved.

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