Pricing applies not only to a start-up, but also to well established businesses, especially those in lower margin, highly competitive industries. The common theme with most pricing issues is risk: risk setting prices too high and you may push potential customers away; risk setting prices too low and you cut profits.
This “pricing paradox” drives most owners to default to discounting. However, risk in most cases can be eliminated by getting better information. Generally, the more you know the less risk you perceive. From that perspective, pricing is all about getting as much information as you can about your market, your customers and your own internal numbers that drive your profit.
How should you set fees or prices for your service business?
Procedures depend upon the business, but the same three elements must be considered for every service business:
- Labour and material costs
These factors must be considered not only during start-up but also during growth.
Labour and Materials
Labour costs are wages and benefits you pay to employees and/or subcontractors who perform, supervise or manage your service business. If you as the owner are involved in a job, then include the cost of your labour in the total labour charge. The cost of your labour will be quite significant during start-up, when most new business owners pour lots of time and energy into their businesses.
Labour costs are usually expressed as an hourly rate. Check in your library’s reference room for government publications giving national and local salary ranges for different occupations. The editors of trade publications may also have similar information. Current rates are often cited in classified newspaper ads or may be available from your local chamber of commerce.
Labour can also be subcontracted – such workers are not on the payroll as employees. When labour is purchased for each job on a contract basis, the full cost is agreed upon in advance, which helps keep your costs fixed. The key is to carefully estimate the labour time it will take to accomplish each job on which you bid.
Profit is the amount of income earned after all costs for providing the service have been met. When calculating the price of a service, profit is applied in the same number as mark-up on the cost of a product.
For instance, if your labour costs for a job are R210, and you plan to net 21 percent before taxes on your gross sales, you’ll need to apply a profit factor of about 25 percent to your labour and overheads to achieve your goal. For example, say you have an operating costs’ subtotal of R324 and you want a profit of R81 – in this case, you quote the customer a price of R405.
If you compare the price of R405 with the cost of labour (R210) already estimated, you’ll notice that one figure is more than double the other. Some contractors use this ratio as a basis for determining price: they estimate their labour costs and then double that figure to arrive at a bid price. Pricing can be time-consuming, especially if you don’t have a knack for it.
Some contractors seem to have a sixth sense when it comes to pricing, and they “guesstimate” on what they need to quote to make a job profitable to them. If you’re just starting out, you obviously won’t have the skill of a seasoned professional.
If your quote is too low, you’ll either rob yourself of profits or be forced to lower the quality of your work to meet the price. If you estimate too high, you may lose a contract, especially if you’re in a competitive bidding situation. Make it your business to learn how to estimate labour time accurately and how to calculate your overheads properly so that when you quote a price, you can be competitive, profitable and successful as a service business.
How to increase prices without losing customers?
Are your prices currently more or less the same as your competitors? If so, you will need to add additional value in order to just increase your prices. Up sell current customers by improving your level of service or by adding a new service/product that will appeal to them.
You can also just continue offering your current service at the old rate but begin to phase it out as you move customers begin to change over to more profitable services.
How To Grow Your Start-Up Venture When You’re Lost
Advice by Anton Ressel on how to grow your start-up venture to get you on the right path.
I have recently started a small business. I would like for my ventures to grow, with some assistance. How do I move forward?
The starting point for any venture is some form of a plan. I am not talking about a telephone-directory thick business plan, nor a plan developed for you by someone else in order to try and raise funding, but rather a tight, concise plan that lays out your core business, your potential customers, your product or service focus and the primary actions you need to do in the short-term to get the concept off the ground.
There are many good templates for a simple strategic plan available online, such as the Business Model Canvas. You should also look at what business development programmes, if any, there are out there that may be able to offer some support.
Finally, you should approach SEDA and see what support they could possibly provide. Find more information on SEDA here.
What tools will make my small business run smoothly?
As a small business owner, it’s normal to find yourself being an accountant, a salesperson, an operations manager and a PA all at once. Here are five tools to help you wear multiple hats without feeling overwhelmed.
Surprisingly, one of the biggest challenges of owning your own business is staying on top of administrative tasks in addition to getting your actual core work completed.
It’s a reality that these admin tasks – from invoicing customers to collaborating on a document – are typically done by the business owners themselves, because there’s not always budget available for any support staff.
We recommend: 4 Signs that your Small Business has Finally Arrived
Here are five tools that can help you manage your business more seamlessly, leaving you free to chase your entrepreneurial dream.
1. Online invoicing software
While creating invoices manually may work in the beginning, this task can quickly become time consuming and hard to control as your business grows.
Manual invoicing also means that things can slip through the net, so you forget to chase outstanding invoices that can in turn impact your cash flow.
A cloud invoicing tool like Freshbooks lets you create invoices online and email them to clients from within the interface.
Besides an easy dashboard showing you how much you’re owed at any point in time, Freshbooks also lets you print reports to use for accounting purposes.
Best of all, your clients can login to their own portal and view invoices, timesheets and more.
2. Cloud file sharing software
Whether you’re on your own or working in a team of 20 people, at some point you’ll need to share documents with another party like a team member or supplier.
These tools allow you to upload and store data (presentations, photos and more) on your cloud-based drive, and then share them easily with anyone you wish.
The best part? The basic versions of both of these tools are free, so it’s as easy as creating an account and you’re off.
3. Asana – project management
A large factor in a project’s success is how efficiently it’s managed internally, because this impacts whether you stick to deadline and how much the project costs in the end.
If you’re sick of sifting through emails relating to a particular project, or can’t keep track of who’s doing what, an online collaboration tool like Asana can help.
With Asana, you can create and assign tasks within a project to team members, and start group conversations that all members can see.
In essence, team members now know exactly what is due when, who’s working on what and whether there are any snags. This keeps work streamlined – and removes the dependence on email as a workflow management tool.
We recommend: 3 Time Management Tips For the Busy Small Business Owner
4. Shared calendars
If you don’t need the full monty in terms of project management, a simple shared calendar can go a long way to keeping employees on the same page.
Using a collaborative cloud system such as Google Calendar that’s shared with everyone on your team means people can quickly find meeting times and holiday weeks that suit everyone else.
Google Calendar can also be synced across multiple devices like your phone and tablet, so you can always stay in touch with scheduling.
5. Other Google Products
Several products within the Google fold have already been mentioned above, but there are others that can help you run your small business more efficiently. If you run a business online, Google Analytics is Google’s free analytics software that tells you who came to your site from where, and what their interactions on the site were.
Finally, if you have a business with one or more physical locations, Google My Business allows you to get your business details (address, pictures, videos, opening hours) onto Google’s search results for free.
Expand or die?
Tips on expanding a business abroad
Should I expand abroad? I am currently considering expanding my kids’ clothing business abroad, with a view to broadening my customer base. Can you possibly offer me some advice on how to go about determining whether this would be a feasible idea, and if there is profit to be made in foreign countries?
Expanding overseas is seen as a natural step in the growth of many businesses, but there are a number of things to take into account. Only after you feel you have covered all of these areas properly should you press ahead.
First take stock of your position in your home market. If you don’t yet command enough of a market share, you may want to reconsider whether now actually is the time to go abroad is.
Remember you are going somewhere where the regulations, economic outlook and customer behaviour can be totally different, so it is even more of a risk than your home market.
I often see entrepreneurs who have less than 5% of their home market trying to go abroad, which simply doesn’t make sense to me. To put it another way – if you haven’t yet cracked Cape Town, don’t go after California!
Understand the market
Every little detail about the trading environment you are going into needs to be understood. There are some huge, multinational firms that have ventured out of their country only to get a nasty surprise. Think about the manufacturing regulations, which is particularly important for your type of business.
Also look at things like HR laws and tax requirements, and crucially, the relationship between currency and inflation rates. I once had a business in Turkey and my profits were being seriously reduced because of the due to unpredictable inflation and currency. I would say there needs to be around 6-12 months of solid research before you make that move abroad.
A more robust infrastructure
Lawyers, accountants, even translators – these will all be critical figures in ensuring your business copes within a new market. They make up the infrastructure of a business, and the stronger the infrastructure, the better you will be.
These people all need to be experts, and I don’t just mean being able to speak the language! They should know all about the business environment in that country, as well as general customer behaviour.
What types of garments are most popular? What times of the year are best from a clothing point of view? They will essentially be your guides who help you come to the correct strategic decisions.
I would strongly recommend finding an international partner. Don’t try and be a hero and go it alone. Working in conjunction with somebody who knows the industry and country will leave you less vulnerable.
You may have to share some equity with them, which a lot of entrepreneurs don’t like doing – but consider this. Would you rather own 60% of a business that has real value and growth prospects, or 100% of a failing business?
Remember the partner will also be able to introduce you to key contacts, which can increase your pipeline.
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