In This Episode
During the second half of last week’s episode we started to talk about how to set your selling price. Unfortunately most small business owners rely too heavily on what their competitors are charging when it comes to setting their selling price. That’s a good piece of information to have but shouldn’t be the sole criterion to setting your selling price. If it is, then you will be on a going out of business curve. Someone will always be willing to go out of business faster than you and undercut your prices as well.
We encourage our business owner clients to instead focus on the true costs of your business when looking to set their selling price. It’s one of the most strategic things you do as a business owner and can lead to great success or failure in your business. Don’t fall into the habit of always using price as the weapon to win customers.
As you know we try to keep things simple when advising our business owner clients. The same is true when it comes to setting selling price. Be sure to have a good handle on your costs as well as a forecast for your volume of sales in the next 12 months. Especially your Material, Labor, and Overhead costs. If you’re in a service-based business, chances are you have little to no Material costs. If you do have Material, make sure you aren’t confusing “markup” for “margin”. On the Labor front you’ll want to have a good sense for productive and unproductive labor. The productive labor typically is billed out as part of producing your product or service whereas the unproductive labor will include things like vacation/sick time and time where folks aren’t working on billable items.
The Overhead is all the other costs that aren’t directly related to the cost of producing your product or service. In fact, many folks refer to these as fixed costs that are there whether you sell anything or not. Things like rent, insurance, utilities, dues & subscriptions. Remember, in addition to knowing these costs, you also need to have a good handle on your forecasted sales volume for the upcoming 12 months. These are the base components you’ll need to properly set your selling price. Take a listen to tonight’s show!
People, Companies and Resources We Mentioned in the Show
Bill Clinton talking to a small business owner during his campaign telling a pizza owner to increase his prices to cover increased costs