Most small business owners don’t charge enough for their service to make a profit.
They are afraid if their price is too high, customers won’t buy from them. They reason that even a small profit is better than no profit at all. This fear actually prevents them from building a sustainable business and keeps them stuck.
People buy when they are in pain and have money to solve that pain. Every customer pays for perceived value, not time. It is difficult for some businesses to determine exactly what that monetary value is. Some review what competitors charge and try to sell for less. They think that this will get customers to switch. However, the best way to actually determine the price for a service is:
- What is the value the customer gets from the service? Charge a price that is a little less than that value so the customer feels they are getting a return.
- What price will allow the company to make a fifty percent gross profit or more? This margin is necessary if the business is to earn a twenty percent net profit.
Once this price is determined, write it down. Then, delete it and raise it by an additional ten percent. For example, if the service price is $1,000, suggest $1,100. Remember, any company can always cut their price once a quote is sent to the customer, but they can’t raise it. Many small business owners are surprised when the customer accepts the higher price. As a result, the company will have increased their net profits by ten percent!
Even if this only works thirty percent of the time, net profit for the company is still increased by 3.3% at no added cost. On revenue of $1M dollars a year, this is an additional $33,000 that can go right into the owner’s pocket!
