The other day I made a mistake, I commented on a person’s pricing, which I thought was extremely low (it was) and offered them some help only to be totally rebuffed. Here’s what happened and I’ll explain my thought processes on why I commented.
I was perusing Facebook and I came across a post from somebody I know a little, who was offering an hour of their time for just £20. Now I don’t know about you but somebody who is charging just £20 an hour is either not very good at what they do, or they are completely underselling themselves and devaluing their brand. This particular person is actually quite good at what they do which is why it’s a little frustrating for me.
Let’s just do the maths for a minute, if you’re selling time (never a good idea but lots of people do) and you want to work the typical working week of 37 hours a week, and a standard working year (assuming no sickness) of 48 weeks a year (having four weeks off for holidays etc) then the length of your working year is 37 * 48= 1776 hours.
Now you can multiply this by £20 to get a total for the maximum revenue you could generate for that year is £35520. However, as we all know, nobody is 100% efficient and in fact, we generally assume that the average number of productive hours is a 3rd of the total available. After all, you’ve got to sell the hours in the first place, you’ve got to do the administration of being a small business owner, etc, all of which eats into the total number of hours available.
This means that the maximum possible revenue using this price point and business model is just £35520 divided by 3 or £11840. Now to put this in context the minimum wage in the UK is £8.72 per hour (for over 25’s). So If you were over 25 and were to work for one of the many businesses that pay minimum wage then your annual salary would be £15,486.62. Which is more than this business owner would make. Ask yourself this question, would you hire somebody to work on something for you, that may be critical to your business, that is worth less than the minimum wage? I wouldn’t. You get what you pay for.
For this person, it gets worse, of course, they have all sorts of business expenses to cover, from paying for the tools of their trade, to marketing expenses, to bookkeeping expenses etc, etc, it goes on and on. All of this comes out of the revenue the business generates leaving even less for the business owner.
The thing is the decisions you make on price have an impact on just about every single area of your business, they impact on:-
- How much revenue you’ll generate.
- How much you can pay you and your staff.
- How much you can spend on marketing.
- How much you can spend on ‘loving your customers’.
- How much you can spend on developing your business.
- How the market will value you and your products and or services
- How your competitors will view your business.
This is why pricing decisions are critical to your business, yet the strange thing is most business owners don’t have any process whatsoever when it comes to setting their prices. In fact, the most common way of setting prices is to look at what their competitors are charging and use this as a benchmark for their prices. They generally set them slightly lower than their competitors, wrongly assuming that people buy on price, they don’t, they buy on perceived value (but that’s for another blog sometime).
Using your competitors as a benchmark is a crazy idea if you think about it, how do you know that you have the same cost structure as your competitor, how do you know that you’re buying products or services at the same rate that they are. You don’t, is the answer.
Setting your prices is a decision that requires serious attention and ideally a process. Decision making is a skill that very few people ever think about or practice. Both decision making and Pricing are part of the virtual business coaching system. You can find out more about these here (Click the button).
So what should this person have done? Well, there are two things they could have done. Firstly they should have realised what damage the low price was doing to them and their reputation and not decided on such a low price in the first place. However if they insisted on charging such a low price then they could have used a simple strategy of discounting. So instead of saying the price was £20 per hour they could have said it was £60 but at the moment they were offering a staggering discount of 66% bringing the price down to £20. Now when they want to charge a reasonable price of £60 it’s easy to do, they just don’t offer the discount anymore.
Are your prices causing you some stress or heartache? I offer a free consultation on how to increase your prices hit the button to schedule your 1-2-1 meeting.
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