Below we’ll investigate a couple of common pricing models. This is your chance to think about how you have priced your product or service, and whether there are any other models that could serve you better.
Are your prices based on what the other guys are charging?
Consider your prices against your immediate competition. Do you want to price higher or lower? Or about the same? In an industry where there is low differentiation between products or services, lots of choice, and minimal barriers to change (think buying a rubbish bin, or a basic monthly mobile phone plan) then price becomes the main competition point. And it can become a race to the bottom in the fierce competition to gain sales.
How do you mitigate this?
Offer a differentiated product, a premium product or additional unique add-ons (think buying a coffee, or hiring an electrician, you get the idea).
This is where you figure out the margin you want to make and add an appropriate mark-up.
Margin pricing is most often used in retail or with products rather than services. It is hard to put a margin on a service, as the cost to serve can often be much less than the value provided. Retailers use cost-plus if they have a standard percentage they need from each sale, and it often allows for deep discounting or regular sales to recuperate the cost of product that isn’t moving.
This pricing model is easy to implement and provides a known return, but it also doesn’t take into account the uniqueness of items or how customers behave. It best suits fast moving consumer goods where there is limited differentiation and low barriers to change.
Some people we chat to, who are just starting out in business, haven’t put much thought into how they price their product or service. It’s important to know how you get to your price, because it means you’ve first thought about how much it’s costing you to produce.
If you have an idea of how much you’d like to charge, make sure you consider all the costs that directly relate to being able to provide your product or service. One of the most underestimated costs are direct wages or salaries.
The actual cost of staff for service-based businesses
If you’re paying someone $25 an hour for a 40-hour week, the salary will be $52,000. However, this isn’t the actual cost to oncharge (plus your margin) to your customers. You need to consider the following:
- Does that salary include (at least) 3% employer Kiwisaver contribution?
- Have you accounted for any ACC levies?
- How many productive hours are actually performed by your employees? You need to consider annual leave, statutory holiday, professional development and sick leave.
Once you’ve allowed for the above, your employee is probably costing closer to $30 an hour.
If you charge an hourly rate, it can potentially have the impression that efficiency is not rewarded. By charging a fixed price, the client knows up-front how much they’re going to pay. Conversely, this can have the effect of valuing speed over accuracy, so could increase the chance of errors.
At Beany, all our services are fixed price. We can offer this because:
- Scoping – we make sure that before we start, we understand the level of work required and how long it will take to deliver it. We also set out what our fee includes and excludes.
- Analysis – we track all our actual time against the budget. If there is ever a blowout, we find the reason and take steps to avoid the situation in the future.
- Experience and knowledge – each team member has at least ten years of accounting experience, and each brings a variety of skills to the table. We understand what’s needed to complete a job and how long it will take.
This model works for our clients because the price is set in advance. We’ve all heard horror stories about escalating costs and unexpected bills. That’s why we agree on the work to be performed (through our Beany pricing plans), and provide separate quotes for out-of-scope services before we start.
If you’re considering moving from an hourly charge to quoting fixed price work, you can use the principles outlined above to see if it’s the right fit for you. If this happens to be a new pricing model for your industry, it could be a great differentiator for your business.
Our hope is that after reading this, you’ll have thought about and mentally tested the way that you price what you sell. Even if you don’t make a single change to price, you’ll have considered the actual cost of of your product and understand the return you receive.
If you’d like to speak to someone about pricing, get in touch with Beany Support at [email protected] We’d love to help!