Pricing - How do you Value Yourself Part 1
Pricing How do you Value Your Product, Service or Idea
So far, you have put everything into getting the prospective client into a meeting with you.
Now what?
They are all excited about what you can do, but here is the BIG question – “What Do You Charge or How much does it cost?”
This is probably one of the most difficult decisions for any business, how do you price your product, service or idea?
When I guide my clients, we have already determined what they want out of life, how much money they would like to earn, how much time they are going to devote to it, and finally the direction they want their company to go in. Pricing is the next step in the marketing process. The biggest difficulty most individuals have is that of determining what price to charge for their services. While stores ponder what price to put products at. After all, you have total control over what the price of anything is.
All too often it's a hit and miss proposition. Often what people do is check out five other purveyors of the same product, service or idea and see what they are charging and either charge a little more or charge a little less than them.
Not the most scientific way of doing things is it?
Let’s start with traditional percentages of what you should pay for various aspects of running your business.
The basic concept here is that your variable costs and fixed costs are covered by what you charge; hence you break even – you don’t lose money and you don’t make any money. Variable costs are those that change with each sale.
First, we must have a basis from which to operate. Here is a tried and true formula that may just do the trick for you. It provides you with a percentage breakdown of revenue and costs as a guideline to start from.
Typical Business Example
Here is an example of a typical business (photographic). In general, most businesses gear towards a profit of 15% after all costs have been paid.
|
Term |
Definition |
Percentage of Income |
|
Revenue |
The total amount of money that you earn |
100% |
|
Cost of Sales (variable costs) |
Variable costs are those that increase whenever you increase the use of consumable items. In photography that would be film or memory sticks, prints, folders, files etc. |
20% |
|
Fixed Costs |
Fixed costs are those costs that you have to pay whether you sell something or not you sell anything. Some of these costs would be rent, telephone, insurance, and wages (including your salary) |
65% |
|
Profit |
The difference between the amount of money you earned and that which you spent equals profit. |
15% |
The most important step is to determine what our fixed expenses are (as best as possible.) Fixed expenses are those expenses, which no matter what is happening in our business, we still have to pay Even though there is no money coming in.
- Figure out all of your expenses
|
Fixed Expenses (monthly) |
% of total sales |
Example |
Your actual $ |
|
Advertising Although some consider advertising as a variable expense, I personally believe that is should be a fixed expense. “A man who stops advertising to save money is like a man who stops a clock to save time.” Henry Ford |
5 |
$ 5000 |
|
|
Auto Obviously this varies depending on use, but in reality it does averages out over a period of a year. |
2 |
$ 2000 |
|
|
Bank Charges and Interest |
2 |
$ 2000 |
|
|
Insurance My grandfather always said that insurance was a necessary evil. Fire destroyed my business and I truly love my insurance agent! |
2 |
$ 2000 |
|
|
Legal and Accounting Important note: Always find the best lawyer and accountant that you can find, they are worth their weight in gold. |
3 |
$ 3000 |
|
|
Licenses and Dues |
1 |
$ 1000 |
|
|
Miscellaneous |
1 |
$ 1000 |
|
|
Office Supplies |
1 |
$ 1000 |
|
|
Owners Salary Yes, you must budget and pay yourself every month. You are worth it and if you don’t, you will suffer and everything else will as well |
17 |
$ 17,000 |
|
|
Rent Location, location, location. I don’t care what I pay for my rent/mortgage as long as it doesn’t exceed 10% of my sales. |
10 |
$ 10,000 |
|
|
Repairs and Maintenance |
1 |
$ 1000 |
|
|
Telephone |
1 |
$ 1000 |
|
|
Travel and Education Always, always keep learning. Whether it is your profession, sales, motivation, best practices – keep learning |
2 |
$ 2000 |
|
|
Utilities |
2 |
$ 2000 |
|
|
Wages Include medical, pension plan, employment and insurance. |
15 |
$ 15,000 |
|
|
Total Expenses |
65% |
$ 65,000 |
|
- Now that we calculated our Total Fixed Expenses it is quite easy to calculate our needed revenue. Simply take the amount that we determined as our Total Fixed Expenses, then multiply that figure by 100, divide the product by 65, which is the percentage that the Total Fixed Expenses should be.
Looking at our example we have the following:
65 65,000
=
100 X
65 is the percentage that fixed expenses should be on average
65,000 is the dollar amount that our fixed expenses amounted to
100 is the base (or whole)
X is the unknown value (total sales needed)
In our example $ 65,000 X 100 = $ 6,500,000 divide this by 65 and we find that we need $ 100,000 in sales for the month.
Let’s put in your figures
Total Fixed EXPENSES _______________ X 100=_______________ (product) Then divide the product _______________ / 65= _______________ Revenue needed
This gives us a good start to looking at the process of Valuing Yourself Properly. Look for my next article coming soon.