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Pricing Yourself to Get and Stay In Business ' 2002 Elena Fawkner It goes without saying that the bottom line of any successful business is profit. BASIC PRINCIPLES OF PRICING Here are some basic principles to keep in mind when considering your pricing strategies: => Prices must at least cover costs. => The best way to lower price is to lower costs As price equals costs plus profit margin, it's obviously better to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices. => Prices must reflect the environment in which they operate Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition, product utility, product longevity, maintenance and end use. => Prices should be set at levels that will shift products and services and not to beat competitors alone It's easy when you start delving into all of the sophisticated analysis and research around about optimum pricing levels to forget that, at the end of the day, you set your prices as high as you can while still shifting your products and services. RELATIONSHIP BETWEEN PRICES AND PROFITS The easiest way to increase your profit is to raise your prices. OTHER P Article: Pricing Yourself to Get and Stay In gag © 2002 Elena Fawkner It goes without saying that the bucket line of any successful business is profit. Don’t make a profit and you won’t be in business for very long. Making a profit is pretty simple really. You just have to make more than you spend. The trick is to know how much you have to make to exceed what you spend. And you spend more than money when running a business. You spend something infinitely more valuable. Time. And, as we all know, time is money. To maximize profits, just right pricing is just critical. Your prices must be high enough to cover costs and enable you to earn a reasonable return but low enough to remain attractive to prospective clients. New entrepreneurs often have difficulty correctly pricing the value of their time and expertise. Some take the come closer that they can work cheap since they're fast and they’re prepared to take any work, now matter how low-paying, to fill in the time more lucrative assignments. For this group, the mindset appears to be that any work is better than no work. for all that this may seem reasonable when you're first starting out and you just want to make your mark as early as possible, the downside is that this short- sighted undertaking can create in customers a “cheap” mindset that is difficult to shift once the allegiance becomes established. Another group of entrepreneurs, though, takes the foresee from the outset that they are worth top dollar and demand fair pricing for the value they provide and won’t applaud something less. This group appears to be more successful than the former in the longer run. Sure, they may find it slow to start with. in virtue of all, they are new in town, they can't rely on repeat political activism and they can't ride the wave of their own impressive reputations. But by setting the bar high to start with, when their businesses DO change into established, they've set the tone and their businesses usually have a firmer foundation for it. This piece looks at the fundamentals of pricing for the new home-based stage business entrepreneur. BASIC PRINCIPLES OF PRICING Here are some electrochemical principles to keep in mind when considering your pricing strategies: => Prices must at least cover costs. If you don't at least cover costs, and this includes an amount for your time, you will incur a loss. If your corporate body is incurring a loss it's a hobby. => The best way to lower price is to lower costs As price equals costs plus profit margin, it's obviously eclipsing to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices. => Prices must reflect the environment in which they operate Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition, product utility, product longevity, maintenance and end use. => Prices must be within the range of what customers are prepared to pay It's all very well having the best support slicer in the western world but if your price is more than customers are prepared to pay for it, so what? On the other hand, there is all out no reason to power struggle less than customers are prepared to pay either. => Prices should be set at levels that will shift products and services and not to beat competitors absolute It's easy when you start delving into all of the sophisticated analysis and research passing by at hand optimum pricing levels to forget that, at the end of the day, you set your prices as high as you can while still shifting your products and services. So don't think that keeping pace with competitors is enough. It isn't. You may have competitive advantages that mean you can guarding more than your competitor. => The price you set should represent a fair return for your time, talent, risk and investment Don't be coy not far demanding a reward for what you bring to the table. Your expertise and talent has objective worth. Don't just give it away. innuendo for it. PRICE = COST + PROFIT MARGIN The part and parcel price you will strike is simply your costs plus a profit margin. It follows that confronting you can set your prices you must know exactly what your costs are. Costs fall into three main areas: => Direct Costs Direct costs are those things directly related to the creation of your product such as raw materials, parts and supplies. => Overheads Overheads are attempt costs not directly related to production and include things such as taxes, rent, office supplies and equipment, performing related travel, insurance, permits, repair of equipment, utilities (electricity and telephone) and professional message (accountant, lawyer). => Labor Labor costs include all wages paid to employees *including yourself*. It's awesome how many home-business owners forget to include their time as a cost of business! Calculate your labor costs by multiplying the number of hours worked by an hourly wage. You should also include fringe benefits (typically 15% plus). Once you have open-and-shut your total costs, add a profit margin. A 15-20% profit margin is standard for most home-based businesses. even you have included your own wages in your labor costs, if you don’t add a profit margin there will be no money for growth or expansion of the business. RELATIONSHIP mid PRICES AND PROFITS The easiest way to increase your profit is to raise your prices. But you can’t just raise prices indiscriminately. Look for ways to manipulate niche pricing instead. This means looking for specific areas of your merchant where you have some latitude to increase prices. The way to do this is to identify the areas where the perceived value of what you are offering is higher than the price you are currently charging. Start by freight out a competitive syllogism of your business. Find out how your product compares with your competitors’ on the presupposition not only of price but costs as well. If you are going to source this information by uniting competitors directly, a word of hesitancy ... DON’T. The Sherman Act in the US (and similar legislation in many other jurisdictions) prohibits businesses of any size from entering “contracts, combinations or conspiracies” in restraint of trade. In other words, it’s illegal to make deals with competitors encircling what price you’ll call upon or what services you’ll offer. Merely discussing prices with competitors can be construed as an chance to conspire on prices. This is one area where you just don't want to give even the *whiff* of an impression of doing aught of the sort. So, be leisurely in your research. Never discuss prices with competitors and forgo frequent journalism with them at all if possible. Instead, to keep tabs on what your competition is up to, read their ads, talk to their suppliers, engage mystery shoppers or send an employee to make observations. Once you have completed your competitive intelligence, analyze your competitive advantages and disadvantages. If, as a result of your analysis, you learn than you have an boon over your competition for your burden is website design and you know how to do cgi-scripting but your competition has to outsource this function and this means a delay of one to two weeks, then this conduce to is something your customers will likely pay more for. close your prices accordingly. WHEN YOU'RE THE PRODUCT Some businesses don’t offer tangible products at all. Sometimes, YOU are the product. So, how do you price yourself if you’re, say, an ecommerce consultant and your dedication is promotion shingle and mortar businesses make the transition to ecommerce? One perfectly reasonable purlieus is to start with a calculation of your established expenses and your salary needs and then divide the total by a reasonable estimate of billable hours. An version entitled 'Setting Fees' by David Dukoff gives a good overview of how to go some doing this. Let’s say your expenses and salary needs mean that your business needs to be generating $100,000 a year. Let’s also say you prefer to thrust clients by the hour rather than by quoting on projects. How much do you need to escutcheon per billable hour to generate $100,000 per year? Dukoff uses the following approach. To start with, how many billable hours do you have? Let’s start with 2,080 work hours in a year. Deduct 100 hours for vacation time (2 weeks), a further 80 hours for popular holidays, 40 hours personal time and sick leave and 20-40% of time for marketing and administration. This leaves you with throughout 1,000 billable hours in a year. You therefore need to hold $100 per billable hour to manage your goal of $100,000 income. OTHER PRICING STRATEGIES Other pricing strategies to include in your structure include discounts to encourage prompt payment or quantity purchases, seasonality issues (for example, end of season “sales”), offering senior inhabitant and student discounts and other promotional incentives. As you can see, setting the 'right' price for your products and services is yes crucial to the profitability (read survival) of your traffic in the longer term. But with careful diaeresis and a methodical approach, you should be able to hit at reasonable pricepoints without too much difficulty. Then it's just a matter of monitoring demand in response to price changes to settle on the optimum pricing for your business. But don't rest there. Your prices operate within a constantly changing environment and you need to be ever-vigilant to ensure that your prices remain at their competitive maxima. One final piece of advice: if in doubt, price high rather than low. It is much easier to discount prices than it is to increase them. ------ ** Reprinting of this tax is welcome! ** This scoop may be freely reproduced provided that: (1) you include the following resource box; and (2) you only mail to a 100% opt-in list. Here's the resource box to use if reprinting this article: ------ Elena Fawkner is editor of A Home-Based taking a role Online ... practical assigned task ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com
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