How Should You Set Your Prices in your New Business?
Start a Local Small Business Podcast – Episode 15 – How Should You Set Your Prices in your New Business
Here is what we discuss in today's episode:
One of the key steps when setting up your new business is to identify and set up what your pricing will look like. The key to setting your prices is to study what your competition is currently doing. Later you can adjust your pricing once you build the business but for starting, you want to follow these tips for setting your prices for your new local small business.
TAKE A LISTEN OR FEEL FREE TO READ THE SHOWNOTES BELOW:
Hey future business owners, it's time for another episode of the start a local small business podcast. Today I want to talk about how you should go about setting your prices.
Obviously, having a game plan for what you plan to charge for the products and services you will have, will be an important part of this journey.
Now, before we jump into pricing, I want to make sure I emphasize that you keep in mind that what you charge in the early stages of your business, are probably not the same prices you will be charging a year from now.
In the beginning, you want to be competitive. You need to get people through the doors if you will. Then after you build the brand, you build your referral base and have a reputation for great service and quality of work, only then can or should you adjust your prices up.
THE FIRST STEP TO IDENTIFYING YOUR PRICES
Believe it or not, if you are following the recommendations I’ve made in the past, then you know you must do your research. And one of those items you must do is, you need to spend some time researching what your competition is charging currently.
Remember, you want to be competitive. So this piece is critical.
As you also might recall, your competition comes in all types of other businesses. You might have other small businesses owners in your area, but you also might have a big box retailer like Home Depot or Lowes to compete with. For some of you, you might even have to compete against Amazon. Yes, the online Amazon.
Today, folks have lots of options, so you want to be on top of things. Yes, people will pay for convenience but they also don’t want to feel like they are getting gouged.
Let’s take a simple garbage disposal install. You have handymen, plumbers, big box retailers all competing to install this for you. Another layer is, if a plumber decides to mark up the garbage disposal $10 for his time and energy to pick it up, the customer might just hop on Amazon and order using their free prime delivery. With today’s internet, plan on people doing their homework and how it might impact your sales and margin.
Speaking of margin, we will discuss this in a later episode, for today, I want to focus on pricing with a touch of margin. But you need to keep in mind that for every product or service, you have a sales price, the cost of goods, expenses and your profit margin.
While your profit margin is critical to understand, don’t let that cloud your pricing. People don’t care how much money you want to make, they care that they pay a fair price for the products and services they receive.
WHAT IS YOUR COMPETITION DOING?
So, the first step is to find out what your competition is charging. As I mentioned, early on, you want to be competitive. Especially as you ramp up your sales.
Keep in mind, big box retailers can sometimes charge less. They leverage their purchasing power and can offer lower prices due to lower costs.
But don’t let this discourage you. Find out what other small mom and pop places are charging, you want to be competitive with them.
When looking at your competitor’s pricing, make sure you investigate what a customer gets for that price. Using our garbage disposal example, if the price is $60 to install but that doesn’t include having to change out plug or replace the p-trap then what do they charge for that additional work?
Sometimes folks can advertise a crazy low price for something, but when you peel it back, nothing is included and odds are the final price will be much higher. Take advantage of that. Offer a price for your service and list out what is included and say no hidden fees. This will add to your integrity and honesty factor. People hate surprises. This will also help explain why you might be slightly higher than your competition.
Now, what about those of you that have a business where you go to your clients home on a weekly or monthly business? How do you set those prices?
Same thing. What are the competitors charging? However, here is the most important thing to ensure. You must make sure that you and your client are on the same page for what work will be done for the price you agree to.
If you are a pool cleaner, what does the $50 you charge cover? Cleaning and chemicals? What if it is extremely dirty due to a party that went crazy? How about repairing pop ups that get stuck? How will you let them know what is extra and beyond the normal charge? Same thing for those of you doing landscaping or any other type of service based business that has a regular routine.
Remember, you want your clients on the same page as you. You do not want surprises on either end. It is a sure way to get an upset customer.
Reoccurring business models can be great money makers. So much so, that I have a future episode planned on the subject.
Now, if you don’t have a reoccurring business, your prices will still be tied to your competition and for some of you, your prices will also be tied to the industry standards. Bottom line, you need to do some homework. What you don’t want to do is pull a number out of your butt. It will bite you in the end. Do the homework.
AVOID THE DANGER
I want you to do the homework so you avoid a danger that comes after you open for business. When your business doesn’t take off like you want, the first thing many small business owners think is, “I must drop my prices”.
But, if you have done your homework and you have priced accordingly, then that isn’t the problem. You have a different problem. If you start dropping your prices, you will be disappointed that A) It doesn’t resolve your problem and B) now you have to raise your prices back up to make up for the lost sales.
I recently met with a new business owner that thought they needed to lower their prices since they business wasn’t growing. She had some feedback from a couple of people that kept trying to get her to lower them. When I asked what her competition was charging, it turns out that they actually were charging slightly higher. So the reality is, after looking at it, her prices were right in line and very fair. If anything, she was leaving money on the table. Her issue was a marketing issue, not a pricing issue.
PRICES IN THE FUTURE
Earlier I mentioned that you want to price correctly to start and later you could adjust your prices up. As you build a good base under you, you get to take on new jobs at a higher price. This is perfect when you are maxed out. Nothing crazy, but slight bumps that still retains your current business but allows you to increase your sales when you have no time to take on new folks.
Remember people will pay for great service and great quality. Your goal in the early stages is to build that great brand around these two things. Once you build a great reputation, people will come knocking on your door and will be willing to pay higher prices.
A VW BUG VS A CADILLAC ESCALADE
Here is an example. Why are people willing to pay more for a Cadillac Escalade vs a VW Bug? Both will get them from Point A to Point B? It comes down to perceived value. People will pay the money for the reputation, and they will pay for the additional value they feel they are getting. Yes, there are more bells and whistles on the Escalade, and there is more leg room and you can fit more people in the Escalade. But there are a lot of vehicles, price wise, between a VW Bug and Escalade that have more room. But, since the purchase is more than about size, they will pay more for the quality of vehicle and its reputation.
So your goal is, how do you take your business and services from a VW Bug to Escalade status?
So, are there other things you can do to set your prices? Yes, but honestly, this method works for the vast majority of you. If you try and get too cute and fancy at this stage, it can backfire on you. So stick to what works, and then once you are up and running, that is when you want to look at the other methods for setting your prices.
Later you will dive in deeper and analyze your business on a weekly basis and your pricing will be one of those areas you will keep an eye on. So don’t over think it in the beginning. Just use your research and trust your gut on what you are finding.
And with that, we will wrap up another episode and I hope you will be back time.
Also, feel free to shoot me your questions at email@example.com and I’ll try and answer your questions. Who knows, your question could end up on either this podcast or on my Local Small Business Coach Podcast depending on when I get it.
By the way, don’t forget to subscribe to the podcast, so you don’t miss any of the future episodes and if you haven’t already, download all the previous episodes so you can catch up. And if you are wanting even more, don’t forget to subscribe to my other podcast, the Local Small Business Coach.
See you next time
Bye for now
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