People start businesses for many reasons – to be your own boss, to have flexibility, to escape the rat race and be home for the kids, or to develop a great idea you have had. But whatever your reason, you need to generate a profit in the long term to keep the business going.
Put simply profit is the difference between your total sales and your total costs for a period and the only ways to increase your profit are to increase your sales, or reduce your costs!
Your costs include the total costs of running your business, not just the direct cost of making what you sell. That’s where pricing becomes difficult, and you need to have some basic information to hand before you can come up with your sales price – you need to know your costs, and you need to have an idea of the income you want to generate for yourself.
Most of my clients provide services, not goods, and often say to me that they don’t really have any costs. But your time is a cost, and you need to have an accurate idea of how long something actually takes to do – and you need to factor it in to your sales price. This might include background research, admin time, client discussions and meetings.
You also need to think about your other costs that are not directly related to one customer – eg rent, subscriptions, insurance, accountancy, phone charges, stationery etc as these all need to be paid from the money generated by your sales if you are to make a profit. Make sure you account for all your costs too – if you don’t include the stationery that you bought while you were at the supermarket, or the parking ticket somewhere on the floor of your car, you aren’t building up an accurate picture of the true costs of running your business.
Once you have all this information – you can think about your pricing strategy. There are many different ways to price your offering – it may be that you have different profit margins for different products depending on the level of expertise required to complete that project, you may offer a discount for buying in bulk. There may be a generally accepted fee in the market place for what you are doing, and you should try to find out what the competition is doing. But remember – you do need to be selling at a profit and covering all your costs if you want to stay in business.
New businesses are often tempted to price their services low to gain clients – and whilst there may be occasions when that’s a good idea – it shouldn’t be a long term strategy, especially if you are operating in a local market. Awkward conversations about why you charge £x to one client and £y to another who turns out to be their best mate can be difficult, even if one was your very first client and you were so excited to get them you quoted a rock-bottom price (yes- I’ve been there!!)
Don’t undervalue yourself and think hard about taking on a client who immediately queries a reasonable quote. A client who wants to knock you down on price may end up being more hassle than they are worth; are they coming to you because they value your service, or because you gave them the cheapest price? You could well be better off with fewer clients paying you a higher price than with lots of clients at a lower price.
So before you stick your finger in the air and come up with a price when next asked, spend a bit of time thinking about what it is actually costing you to run your business, add in your profit margin and quote accordingly!
Rosie is a Chartered Accountant. She has run Wilkins & Co for 18 years, providing a full range of accountancy, bookkeeping and taxation services to new businesses, sole traders, partnerships and limited companies.
In her own words:
’I work with many small businesses, and often I am their "outsourced" finance department. I not only ensure all deadlines are met, but also that they understand their accounts and how they can save tax. I turn work around quickly and offer advice that is relevant and easy to understand.
I aim to save my clients time, money and stress by taking care of their tax and accounting requirements, leaving them free to concentrate on running their business, doing what they enjoy and what they are best at!’
Phone: 01628 530085