Very often someone would say, “What the market will bear”. I did not, to avoid embarrassing anybody, respond by asking them to explain how they would establish the price the market would bear.
The problem with this statement is that there are many different markets – and each market may consist of many different types of companies and people. Those starting a small business seldom have the resources to conduct the necessary research about pricing. But what of their experience? In the second half of the 80s the South African economy was in bad shape. The prime overdraft rate had climbed to 25% and the Rand had started its steady decline. There were many people who were retrenched and some wanted to start a business of their own. I found that some of them, including some who had been senior managers, had no idea about pricing. This is probably because when things are going well people don’t question or think about what they’re doing – it has been working for them so far so why think about change. So no learning takes place.
So what do you charge? As high a price as you can while still being able to achieve the sales necessary to make a profit. Remembering also that people often associate higher prices with good quality.
People often asked about the percentage mark-up (i.e. the percentage they should add to their cost to arrive at a selling price) they should use. This brought me to the following; in arriving at your selling price your costs are irrelevant (of course you should not sell at below cost). This is because people buy solutions to problems. If your products, be it something physical or a service, will solve a R10,000 problem and your cost is R2,000 why relate your price to your cost. If you only charge around R4,000 you may be making a profit but undervaluing your product. If you were to charge around R8,000 you would be making a better profit and still leaving something in it for the customer. It’s all about adding value to your customers. Being able to do this does, however, require a knowledge of your customers business and the costs they have. You acquire this knowledge by talking and listening to customers instead of being in constant selling mode.
Of course, all of the above requires that you really understand what your costs are – and what your competitors are charging
Question: I am thinking of offering a ‘Start Your Own Business’ workshop. It would two days and be b held on a Saturday and Sunday to cater for people who may have difficulties in getting off work. If you are interested please let me know in the comments section below.