Thanks to Ellen Rohr for preparing this great guest blog all about charging. Great ideas for watching what you spend!
How Much Should I
Charge?
Have
you ever done this: called up one of
your competitors, assumed a fake voice and asked, “How much do you
charge?”? Go ahead. Admit it.
We all do that kind of nonsense.
But
here’s the really silly part. Have you
ever adjusted your selling price to match or beat his price??
If
you took Economics 101 in high school or college, you learned that selling
prices for goods and services are determined by “what the market will
bear”. That means that consumers - the
market - decide what a product is worth, and will give so much money, but no
more, for that product.
After
doing a fake-voice phone survey of a few companies, and setting your prices
somewhere in their range, you might say you are charging “what the market will
bear”. This beats going to the trouble
of figuring out what your company’s break-even point is. “We can’t charge more than ‘what the market
will bear’!” is delivered as a logical
reason for maintaining below-cost selling prices.
Can YOU Bear the Market?
But
here’s the rub. The “what the market
will bear” rule applies to commodities.
Commodities are products that don’t differ much from vendor to
vendor. Gold, for instance, is a
commodity. Gold is gold is gold. Gold will follow the Economic rule of ‘what
the market will bear’ pretty nicely. It
will be directly affected by the law of ‘supply and demand’. Economics 101 works well when you are talking
about commodities.
But
it doesn’t count for much as far as your
products and services go.
Here’s
the real rule, the ‘street’ rule,
the rule they don’t teach you in Economics 101:
the market doesn’t set the selling price. The marketers
do.
·
Why does Coca Cola sell for three times
the price of Best Choice cola?
·
How come Rolex sells watches for
$50,000 when you can get a very nice watch for $100?
·
Why would anyone pay $970,000 for a
McLaren car to travel 0-60 mph in 3.2 seconds a Hyundai will get you there
about a second later?
The
marketers in this world differentiate their products, and make them something
more than a commodity. Marketers create
and communicate features that benefit consumers. Benefits add value to the product. Coke is the real thing. A Rolex is a
symbol of wealth and power. And the McLaren
goes really fast. (Speed is always a cool product
feature). Higher value commands a
higher price.
If
value = price, then there is no sale.
V = P
= No Sale
Cash
in pocket will only be exchanged for something that has a higher perceived
value. So, if a product is worth exactly
what you are charging for it, no one will buy it. What usually happens is that you will drop
your price until the value of your product becomes bigger than the price.
V
> p
; then, Sale
However,
the marketer increases the value until the price looks insignificant.
V
> P ; then, profitable Sale
You
see, there is a huge problem with basing your prices on what your competition
is charging, on ‘what the market will bear’.
I bet your competition is even more ignorant than you are when it comes
to knowing his break-even and his true costs of doing business. He got his selling price by calling other
companies, companies that are now out of business. Don’t assume that your competition knows what
he is doing!
Lots
of folks get confused when they set their selling prices. They look at what everyone else is charging,
then they hope and pray that they can make money at those prices. So, don’t beat yourself up.
Crunch the Numbers!
Just
price your products and services the right way.
Decide how much money you want to make.
Offer a terrific product. Figure
out ALL your costs of doing business.
Come up with a selling price that makes your dreams come true. I’ve included a cool Budgeting/Financial Goal
setting spreadsheet. Check it out at…
You
can use this form to set Goals for Sales and Expenses. And the Key Numbers tab helps you crunch the
numbers to create a reasonable Selling Price.
Do you sell your time? The
spreadsheet is ready to go? Do you sell
a widget, like T-shirts or jewelry? Edit
the form to work for you…and ask, “How many widgets could I sell?” Play with several scenarios. The bottom line is…the bottom line! If you are making all the money you want,
your Selling Price strategy is working.
If not, a Selling Price increase may be just what you need.
Raise your Prices.
My
vote: Raise your prices! Then, adopt a marketer’s mindset. Create so much value for your product that
your customers beg to buy it.
And forget what the ‘market will
bear’.
Ellen Rohr
Copyright Ellen Rohr
First Serial Rights
