I want to talk about another critical aspect of start-up, small business, solo practice or self-employed Basic Finance: knowing if you’re priced right. Imagine knowing when you go to sleep at night that the way you charge your customers (your business model) and the amount you charge makes sense. How can you, a non-finance person, figure out if you’re priced right? The great thing about this question is you don’t need big elaborate financial systems or formulas.
That’s the beauty of Small Business Basic Finance. You get to know what you need to know about your business’ finances and at the same time take a critical look at your business model – the essence of your business – without needing accountants and complicated software. Just you and your business.
The second biggest question from my survey two weeks ago was “am I priced right?” I get a lot of questions about this from my seminars and private clients.
Let’s start with the building blocks. There are 3 things that go into whether your pricing is right and all 3 are important. Being priced right means optimizing (making each the best it can be without taking away from any of the others) all three:
- Competitive analysis – are other people who offer similar goods and services priced similarly to you?
- Business Model analysis – Does the way you charge your customers (e.g. hourly, retainer) make sense for the goods/services you offer and the value you provide?
- Survivability – is your business surviving financially and providing enough to live on?
How do you analyze the three critical pricing factors above?
- Know your industry – The cheapest competitor and the most expensive competitor in your region form an “acceptable price” band for you to fit into.
- Know your customers – know how they get paid (therefore have money to pay you) and how they pay other service providers (are consultants usually paid day rates or hourly). Make it easy them to pay you by fitting into their ‘normal’ pay and expense cycles.
- Know your service/product – a) If you perform a service that finished at a predictable time (therapy, technical writing, proposal writing, event planning), you should be paid at the end of the time you perform the service (or intervals therein like every 2 two weeks); and b) If you perform a service where the quality of the outcome can be measured then try ‘merit’ pay, like a bonus if more of your client’s products are sold.
- Know your market – you may really want to teach dogs to sing, but there may not be a lot of dog owners who want singing dogs. It may not be that your price is wrong. It may be that you are providing a service nobody really needs and if you tweak your service offer to fulfill your client’s needs better, your client base with grow.
- Know your business needs – from last week, know how much your business needs to survive AND grow, including paying your employees a competitive wage. If you’re not making that amount, you may need to look at your business model or raise your prices.
- Know what you need – from last week, if your business does not pay you enough, you should consider raising prices if all other factors are optimized.
The way to optimize all of these factors is to have a spreadsheet or piece of paper that takes your upcoming projects (your pipeline) and subtracts your upcoming expenses on a monthly basis. Then, you can change your pipeline based on different prices and see if you are surviving (and thriving) and if your prices are within competitive standards.
It’s called a simple cash flow and I’m going to show everyone starting from blank paper to finished product how to create one for your business holding your hand each step of the way. You can then make informed decisions on whether you’re priced right or you need to tweak your services, prices, or business model.
The Small Business Finance Basics Webinar is for non-finance entrepreneurs, sole practitioners, start-up founders and heads of small businesses. I’ve been showing people small businesses basic finance for a long time (since I was CFO of a small company in 2000), without jargon, complicated finance or accounting. People have been asking me to put my process into a webinar so they can master it themselves and not have to pay someone else to know their Small Business Basic Finances for them.