How to earn more for the product or service your small business provides

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Toss Grumley is the owner and business coach at business advisory Wolf & Fox.

Getting leads is great; converting them into sales is even better. But how do you make sure you are earning as much as you can for your product or service?

Correct pricing can be difficult, but it can be the difference between a highly profitable business and one that struggles.

In this article, we will focus on how to hit the right price point and ensure that you, the business owner, reap the rewards.

Pricing correctly

Firstly, pricing is an art, not a science. Many people have their own rules when applying product and service margins and mark-ups, and even apply different margins across different industries.

But this can get arbitrary, and it relies on historical data. I believe that the correct way to price something is to offer it at the maximum price before people don’t buy. Finding this sweet spot usually involves researching the market and your competitors’ offers, then working out where your brand is positioned against them.

Then you can start to test your pricing. Don’t be afraid to move it up if there is no push-back, especially across your different services or for your next run if it’s a product business.

What margin?

Not to be mixed up with mark-up, margin is how much money you actually keep from the sale. For example, if you had a product priced at $100 and your costs were $60, that would leave you $40 – that’s a 40% margin.

A higher margin to achieve profitability is always better than a higher turnover to achieve profitability. For example, if your business turned over $1,000,000 per year and you put your prices up 5% – thus increasing your margin by 5% – you’d be around $50,000 better off in the pocket the next year with no extra labour. Comparatively, it would be harder to increase turnover to achieve the same profit.

Where this gets risky is when people apply minimum margin formulas when working out pricing in every instance. Being too strict on any rule can cost you a lot of sales in the long run. To give an extreme example, $100,000 worth of sales at 30% margin is better than $0.0 at 50% margin.

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Influencing price with a desirable brand

This is where I see great money being made across my advisory client base. If you build a great brand with loyal customers, you can charge more for the same output or move to value-based pricing.

Once you become an industry leader with your services or products, you can achieve your maximum price and margin. This gives you a low break-even point for a lot more wriggle room and also a far more profitable business.

We often forget that price also indicates quality. If I showed you a pair of shoes worth $1,000 and a pair worth $200, which one would you think is better? We are always so scared to increase prices, but often a higher price can actually improve sales.

Time factor

This is for the services crowd. Make sure you charge for the time you are actually working. Most services businesses I see are charging for a fraction of the time they are doing for their clients. There is no point having a good hourly rate and then never billing for time spent.

The easiest way to look at this is to work out your effective hourly rate. Look at the revenue for yourself (or a staff member) per year, then divide that by 48 weeks and 40 hours a week. The number you get will be way below what you think you’re charging per hour. On top of that, many small business owners will be working way more than 40 hours a week.

Begin to track your time and bill correctly. And if your customers push back, look at your service levels, price or brand, then figure out how to deliver a service that justifies your price and actual hours of work.

By getting the right balance for each of the above points, you can have a business that generates the maximum amount of revenue for your output.

Pricing is the first critical step in creating an economic model that works for your business. And when you combine this with managing expenses under your control, you can have a highly profitable and successful business.

Toss Grumley is the owner and business coach at business advisory Wolf & Fox. He is also a director and board member of Powerhouse Digital Agency, Oxen Accounting and Youth Arts New Zealand.

The next article in this series will focus on how to sell more to the same people and get more repeat transactions for your business.