When business owners of SMEs are asked what makes them different, they nearly always refer to the quality of their service or product compared to competitors. Clearly, if they are doing what they say, then they have an “edge” and should be able to charge more. But in a follow-up question, they often admit to trying to compete on price, otherwise they will not get any sales.
Both reasons seem to stand up in isolation, but together it is madness. If you are offering something better, you should be able to command a better price. Lowest price to secure work is a recipe for disaster, and many small business owners would be better off getting a job working for someone else.
What Is Your “Edge” and How Much Is It Worth?
Finding a pricing point in the market is about knowing your edge and being able to articulate it to any potential buyer. Buyers must be prepared to pay for it, and the number of customers prepared to do so is the size of your market. After 18 months of trading, your edge should be clearly defined, your prices should reflect it, and the size of your market should be known. Your edge should evolve into a brand that staff, customers, and suppliers can all identify with. A strong brand commands a higher price — think of the pricing of Apple products.
Am I Making a Profit at the Proposed Price?
Pricing breaks down into three key parts: the variable cost of production for each item sold; the cost of running the business if you sold nothing (all overhead items like fees, premises, and marketing); and the profit. Unless the profit is at a sensible level, there is no point in continuing. To increase profit, you either sell more and keep the overheads the same, reduce the cost of production, or raise prices until people stop buying.
Tracking the Market
If you never lose an order on price, you are not charging enough — you do not know where the ceiling is. To lose some orders is perfectly acceptable, but losing frequently will cost you dearly in bidding costs. The loss of an order gives you important feedback.
If you have worked out your variable costs and overheads correctly and add a known percentage for profit, you can adjust the profit percentage on the next bid to either win or lose the bid, depending on your appetite. With practice you should be able to determine the maximum you can charge in any given situation.
Consider this: if you sold an item for £10 and it cost £8 to make, there is a £2 profit. Selling 100 makes £200. Raise the unit price to £12 and the same 100 items make £400 profit. To make £400 at £10 you would have had to make 200 items — think how quality might have suffered with such an increase in production. Pricing is both a science and an art, and it is critical to the success of a business.
