Ideas Genius gets to the heart of making a business out of your ideas. Today it’s that dreaded area of money and getting paid. This post is a practical guide for how and what to charge for your service, product or idea. To begin, we all have different attitudes towards money (which is a completely different topic – may go into that in another blog), so we need to establish certain principles.
The Head Game
Firstly, let’s flip your thinking about transactions – that is, exchanging what you have for what they (your clients) have. We re-frame that as exchanging what you WANT for what they NEED. It sounds simple but that distinction is important. They have come to you because they have a need or problem. They are trying to fix, resolve or satisfy the need. Your business or idea is the solution to that. If the customer has contacted you, it is no longer a question of whether your product is what they want. You’re talking about it so, at the very least, they have given your service a high probability of meeting their need. And guess what? You are willing to give them that solution in exchange for something… Sounds like a win-win situation already.
The transaction is about now about price, and no longer just about the product. Most businesses send a lot of time trying to tweak what they offer to fit a price. Think product first about it. Your customer already knows what they want the item to do. It’s the reason you go into a shop to ask about a pair of shoes or call a plumber for a quote. You are convinced that the product or service is what you need. In your mind, you have already considered that this could be a good option IF the price is right. We rarely ask the shopkeeper to take an inch off the heel so it meets your budget or ask the plumber to only reduce the size of the leak because you can only afford that much. Once you understand that you are in a good position to help your customer out, you will be more confident about how and what you charge for it; and whether and how you negotiate. So first of all, be confident in your product.
The Decision Is Yours
Yes or yes? How much you charge is completely up to you. You have all the options. The customer is always right, yes. However, they don’t dictate how you run your business. They can only decide:
- I want it and
- I can afford it.
Your job is to make what you offer affordable and that does not necessarily mean making it cheap.
You can decide that what you have is of a different quality, or is more convenient than similar services; either you have a wider range or are a specialist niche. These things are all distinctive about your brand, service or product, and what you offer is unique. So before you work out how much you are going to charge, decide WHAT it is you’re offering? Are you a McDonalds franchise or The Ivy? Do you deliver a bespoke service or one size fits all? Is your product a rarity or convenient?
Stay In Your Lane
The final point before we get into putting your numbers together is subtle but very important. Not everyone wants the same thing. You may not be able to satisfy everyone with the same product or service. Once you know the type of business you are… stick with it! It is easy to be tempted to change your pricing because your market is quiet and others in your industry or specialism ‘appear’ to be doing better. It is critical that you stick to your guns because that is as much a definition of what you offer as your brand itself.
Imagine a high-end service provider offering bargain basement rates overnight; or a 99p store selling items for £10. You have already started to think about the possible back story which may make you feel insecure or unstable about buying from that business. Sticking to your prices is vital to your credibility. However, there are ways of making promotions and negotiation work in your favour to meet an opportunity or gap in your market (that’s a completely different blog).
So How Much Do I Charge?
In pitching your business or idea to a price, three things are key:
- How much does it cost to make?
- How much income do I expect from the business overall?
- How much am I likely to sell it for?
How much does it cost to make it?
Everything has a direct or indirect cost. In our experience, this is the hardest things for a new business to work out. Even when the only thing you put in is time; time has a cost. If you were not doing this, what would you be doing and how much could you earn in that time? Too much already? Sorry, we’ll slow down…
Let’s look at price with a common example:
Cupcakes – a popular business opportunity at the moment, but how much do you charge for a cupcake? Well first of all, you would rarely make just one cupcake. All that shopping, mixing, baking and icing for one cake? Perhaps 12 cupcakes are more likely. Already we had worked out that even when we sell one cake, it is part of a batch of twelve. So it might be easier to look at pricing from the perspective of 12 cakes rather than just one.
Here’s how much to charge for 12 cupcakes:
Add up the cost of all the ingredients including the cups.
Add the proportion of your electricity bill or gas bill to make the cakes (yes, you do need to know that)
Add your time (how many hours does it take to make them – including going to the shops for the ingredients)
Add the time and method they will get to the client (are you delivering them or are they picking them up?)
We’ll stop here. This should be the very basic price you charge for 12 cupcakes – if you do this process every single time you get an order. For the price of one cupcake, divide by 12.
Now you can add the following things that make you a more than basic supplier of cupcakes:
A proportion that covers your packaging and marketing
A proportion to cover your administration costs, phone, website etc.
Another slice to cover development i.e. investing in yourself to be a better cupcake maker (training course, a new recipe book, extra dough and icing to experiment with, etc.)
Oh and what about a profit? You do have other bills to pay.
This does mean taking some time out to look specifically at what you do and how you plan to do it. It can be quite confusing but we promise you that it’s well worth the attention. If you need assistance to go through this for your business, contact us and we’ll help you work it out.
How much income do I expect from the business overall?
A common assumption is that once you start your business you will be charging enough to pay all your outgoings. So if your monthly bills come to £1000, you would have to sell £1000 worth of cupcakes. Wrong!! More like £1000 plus the costs making and delivering all those cupcakes. Immediately you’ll see that you’ll have to sell a lot more than 12 cupcakes a day otherwise you’ll be kicked out of home for rent arrears.
In our example, we researched other suppliers and twelve cupcakes can range from £15 – £60 for a dozen. So we’ve pitched ours here at £30. We’ll explain a bit more about researching later.
Next, sizing your business as ‘how much per week/per month/per year’ can be really helpful in setting the right charge price. You may then choose to make cupcakes as one part of your business, but also birthday cakes which you can charge more for. Hey… and why not wedding cakes? You could charge a lot more money because they are even more special but with pretty much the same equipment and ingredients. Now you’ve got something that each month looks like this:
- 10 orders of cupcakes (at £30 each order)
- 4 birthday cakes (£50 each)
- 1 wedding (£500 – evidently I don’t buy wedding cakes often)
That’s £300 + £200 + £500 = £1000. Note: this is not all profit. What you have started to do however is work out that some of what you do will sell for more than others. Welcome to Product Strategy 101.
The alternative would be to try and make 34 orders of cupcakes a month (going to the oven 34 times rather than only 15 times in the above example).
Charging for ‘special’ orders moves you from the ‘per time’ type of pricing to ‘per project’. Making a wedding cake might not take ten times as long as a birthday cake; but it’s special and special jobs have special prices.
How much am I likely to sell it for?
The average wedding cake can cost 10 times that of a birthday cake. There is almost an expectation that it should sell for that much. Whether we like it or not, some things sell for more money than other things; no matter how similar they are.
Personal trainers cost more than going to the gym by yourself or using a DVD. Food in containers sell for less than food on a plate. Your decision about where in that scale you want to position your brand will affect how you are perceived. Here is our insight:
It doesn’t matter where you put your business. You can succeed as long as you run it accordingly.
Researching similar businesses will give you an idea of what others charge in your industry for THEIR service. This should only be used as your price guide because your business may be similar but not the same. The value of your product is often communicated with the price. This is the reason why certain brands are considered a cheaper option. They will do the job in the same way, however there will be a different expectation. It does not mean that one is better or worse than the other; but simply they meet a different need.
The best example of this is Primark. Love it or not – despite questions about the perceived ‘quality’ of the products – they are one of the fastest growing clothing retailers in the United Kingdom. A small price does not have to mean a small business. What is more important is the model of your business – the way your run your business to make it most profitable.
Recently in a barbershop debate, we were discussing whether or not a particular music artist was ‘good’. The discussion compared their early underground work to their new, more pop, inclusive sound. The implication being ‘you are better because you’re selling more records’. One very sharp commenter remarked:
“KFC sells more chicken than my Mum but you can’t tell me hers isn’t the best”.
Simply stated and very true. What your customer thinks is good, best, worthwhile or affordable is all down to what you (and only you) can give them in return for them making the decision to buy from you. There might be others doing similar or even the same thing. However, what makes the difference between winning or losing a customer is you – firstly your product, then your price.
If you would like to discuss your business, pricing or how to present your product in the best way possible, get in touch with firstname.lastname@example.org.
Cupcake image courtesy of @KupKase – this is not their business plan 🙂