The 1 Question you’ve probably never asked…
The 1 Question you’ve probably never asked that could make your business insanely profitable.
When most new businesses go about setting their pricing model, they generally:
1. Look at what competitors are charging and set their price somewhere near that price point (usually below, which is most often a mistake)
2. Determine how much money they’d like to make over a particular time period, determine how many projects they can handle during this time period and calculate how much they need to charge to reach their desired income level
3. Undercut every company in America to get the “pipeline” flowing
What I’m about to tell you, because you’ve most likely never heard it before, may strike you as odd and it may even anger some of you.
All 3 of these methods are a waste of time!
There is really only one smart way to come up with a pricing model, and that is by asking this one simple question:
WHAT ARE MY TARGET CUSTOMERS WILLING TO PAY?
You see, by answering this one simple question, you are shifting your mind out of its “Me, I, Mine” mode into the mode that every forward-thinking business person should be in, “What do they want and how much are they willing to pay for it?”
To take a step back for a second, to realize how often we are in “I, Me, Mine” mode, lets take a look at the very nucleus of most businesses: deciding what products or services to offer. All too often, I see clients who have gone into business to provide a product or service that, for whatever reason, they really wanted to provide. Had these clients gone through the process of figuring out the demand for a particular product or service BEFORE they set out to provide it, some of them would be in much better (i.e. profitable) positions than they are now.
So, back to pricing, if you can determine what people are willing to pay for your product or service, you will be much further ahead than everyone else in your field. When you price yourself near your competition, or heaven forbid at a price point LOWER than your competition, you’re assuming that your competition was smart enough to research their price points. Well, I can assure you, in most cases you are giving your competition way too much credit.
Try testing alternative pricing methods on potential clients and keep raising prices until you hit severe resistance. However, do not forget to keep a running tally of overall revenue. Why? Because, as you raise your prices, at some point you will begin to see some drop off in clients who aren’t willing to pay, which may start to give you cold feet, but, what you must remember is that even if you lose some of those potential clients, the higher your price, the less clients you actually need to hire you to make the same amount of money.
Lets look at a quick example:
– If I provide auto-detailing services for $50.00 per car, and I get 100 new clients a month, I gross $5000.00 per month.
– If instead of charging $50.00 per car, I charge $75.00 per car, I can gross the same $5000.00 per month by detailing only 67 cars.
– Now, if I can get 50 people to pay $100.00 per car, then I now have to service only half of the clients that I had to at $50.00 per car, who I can undoubtedly give more attention to, and I can still make the same $5000.00 per month.
I don’t know about you, but the third option makes me smile a lot more than the first or even the second option.
So, before you make an arbitrary pricing decision, be sure to think it through. I’d be willing to bet that most of you aren’t charging nearly what the market will bare … trust me, or start raising your rates and see for yourself.