Talking business with Ellen Rohr: Setting your pricing strategy
Our expert shares tips on how to effectively determine your prices.
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I'm Ellen Rohr. Let's talk about selling price strategy.
One way to create a selling price strategy is to start with a financial goal. So suppose you want to make $100,000, and you determine that as a one-person business you have 1,000 billable hours you could sell.
Well, if you do the math, that would mean that your selling price would have to be at least $100 per hour for you to reach your goal of $100,000 a year. And you haven't bought a pencil yet, or a computer. So you can see how you might have to raise your prices to achieve your financial goals.
The most common mistake that business owners make when it comes to setting their selling prices is they'll call their competition and ask them how much they charge, and then charge the same thing, or worse, less than that. You don't have to be bound by what the market will bear, or the going rate.
Let's look at Starbucks. They took coffee, which is kind of a commodity, and turned it on its ear. Instead of just selling coffee, they created an experience. There's hip baristas, there's cool music, the smell of the place. There's Internet so you'll stay and hang out. So they created an experience, and as a result, now sell a premium cup of coffee.
As a small business owner, choosing to be the low-price provider in your industry is a brutal undertaking. Instead, consider how could you add so much value to your products and services that you could charge more than the going rate or what the market will bear.
In my plumbing business, after I crunched the numbers and realized I was going to have to raise my prices, I worried about it because my competitors were charging time and material, and if I raised my prices, I was just going to stick out. We decided to charge upfront flat-rate pricing.
And this was really great because what customers didn't like about time and material pricing is that they wouldn't know how much it cost until the job was over. What we could do is say, "This is how much the repair will be," before we even start the work. Then they could agree to that, and it was a lot easier on our customers. So we could raise our prices without being so obvious about it.
If you're considering a dramatic increase in your selling price, you're going to have to be better and communicate that to your customers. You're going to have to be cleaner, or faster, or the exclusive provider of a product or service.
And the cool thing is you probably already are doing something that's perceived as better than your competitors. So you might ask your customers, "What is it that I do that makes you say yes? If I raised my prices, would you still say yes?" Ask them, and they'll tell you what makes you unique and wonderful. And then that can inform your marketing and your sales strategy.