This article looks at a couple of common pricing models. It’s your opportunity to think about how you priced your product or service, and whether there could be a better way.
Are your prices based on what the other guys are charging?
Think about who you compete against. Do you want to price higher or lower? Or about the same? Industries with many, similar products or services with easy switching (think buying a coffee) usual compete on price. Which means it can become a race to the bottom in a fierce competition to gain sales.
How do you prevent this?
By having a point of difference, a premium product or having unique add-ons. A café with an award-winning barista might be able to charge more for their coffee.
This is where you figure out the profit you want, and add that as a mark-up to your costs.
Margin pricing is usually used for retail products. It’s trickier to work out a margin on a service, as the cost to serve can be much less than the value provided. Retailers prefer to use cost-plus if they have a standard percentage they need from each sale. It allows them to do deep discounting or have regular sales to get rid of old stock.
This is an easy pricing model to use, and it gives you a known return. However it doesn’t work well for unique items, or account for customer behaviours. It best suits fast moving consumer goods where it’s easy to switch brands and there are plenty of competitors.
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) your compulsory 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 down time, training, annual leave, statutory holiday, professional development and sick leave.
Once you’ve allowed for the above, your employee is probably costing closer to $35 an hour.
If you charge your customers an hourly rate, they (rightly) could think they’ll pay you more if you take longer. By charging a fixed price, your clients know up-front how much they’re going to pay. On the flip side, this could value speed over accuracy, increasing 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 – our team has so many years of accounting experience, and everyone brings a variety of skills. We understand what’s needed to complete a job and how long it will take.
We’ve all heard horror stories about huge 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 hourly rates to fixed prices, think about the above to see if it’s the right fit for you. If this is a new pricing model for your industry, it could be a great way to stand out from the competition.
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@example.com. We’d love to help!
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