How can someone who is just starting out best determine how to price their product or service?
- First you need to figure out what holes exist in the marketplace – what the customers are really looking for, what problem they need solved, what doesn’t already exist, what they are jumping up and down to have.
- Then you need to determine who the target audience is. With event planning, for example, maybe you’ve identified a need in the market for someone to do day-of events, but one target audience will price that differently than another.
- Next, you need to make a list of every single component that will go into providing that product or service. From the initial email or phone conversation, how much time you spend talking to the client, creating a proposal, researching the details, any and every aspect of the pre-preparation – the list should be long and very granular if you are doing it properly. Write it all down and then get into the production phase of it – the drive time, the packaging, the conference calls and meetings, whether with the client or with other members of the team or vendors. And then you consider the wrap-up phase. What is the follow-up, the sending of gifts, taking people to lunch? You have to take every single bit of it into account.
- Then you need to determine two things: what is your desired hourly rate, and what is your walk-away rate? The “walk-away rate” is for times when business is slow; maybe your typical rate is $100/hour, but during a season when you have less business and want to keep working and keep your team working, you would take $50/hour.
- Then you just multiply the amount of time it all takes you by your desired hourly rate!
- Next, you need to determine your cost of goods sold. If you have a product-based business, it’s the leather or the buckles or the zippers for the bags you are making. But if it’s a service-based business, it might be Fed-Exing samples or your bookkeeper’s time or the credit card fees to process payments. So many of these small charges seem insignificant, but you have to take every piece of it into consideration to make sure you are covering expenses and getting your desired hourly rate.
- Of course it’s rarely that simple! So then you go back to the drawing board. You know what your rate SHOULD be based on this model, but if you’re having a hard time getting your desired rate then your two options are to get more efficient (by seeing what you can delegate) or to reduce your costs (less FedEx, more inexpensive paper, etc.) You have to continually course-correct.
How should a service professional determine their hourly rate? Service professionals and product people think they are so different from each other when in reality they are not! If you are in a service business, you are the commodity. You are what is being marked up. It’s really no different. Both types of businesses have costs of good sold. The service side is generally much less, but you do still have those expenses. The costs of driving to a meeting, parking your car, taking a client to lunch – those are your costs of goods sold.
How often should a business be looking to develop a new revenue stream? What are your tips for identifying a new revenue stream? These shouldn’t be the first questions. They should be: Where are we with our current revenue streams, how can we improve the margins on them, and which ones is it time to retire? And THEN you ask yourselves which new ones to start. We all tend to think it’ll be so easy to add a new shingle or another service. But we should constantly be assessing the markup on the current products or services we are providing. The results will show you where are you most profitable, and that is what will tell you what new shingle to hang or whether you should spend your time shoring up (or getting rid of!) the ones you already have in place. I rarely see anyone be able to state with any kind of accuracy what their current margins truly are. And that is frightening! Big businesses do it all the time. Small business owners seem to think they either don’t have to do it or aren’t skilled enough to do it, but it’s crucial.
Your book “But Are You Making Any Money?” addresses some of these issues of profitability. At what point should a business reasonably expect to be profitable? And if they aren’t, what mistakes are they making? A business can reasonably expect to be profitable from day one if they set things up properly. It’s a myth that it needs to take a year; it depends on capital expenditure, of course, but for small businesses it should be set up to be profitable pretty quickly. Have a lean start-up – you don’t have to launch the mack daddy version of your product, that’s what pre-orders and pre-testing the market are for. Do those things first and then come back later to launching things that are more expensive. It’s great to get excited about your business, but you don’t need to go hog wild. In the early days, you need to look for the lowest hanging fruit and figure out where you can get the biggest bang for your buck.
When did you know you wanted to pursue your business or venture? When I was in college and got engaged to a chef, I knew that I really wanted to get into the restaurant business. From that point on, I never really did work for anyone else other than a food purveyor for six months right after college. A career in the restaurant business prepared me for the party goods business because it showed me what I liked and didn’t like about the food business and where my skills were best suited.
Did your original business plan change along the way or are you doing exactly what you set out to do? If it changed, how so? It absolutely changed. I think that for most people, if they make a business plan at all, they do it and sort of check it off their list and then put it in the proverbial drawer. But the best-case scenario is that your business plan is a living document and that you are constantly looking at it as a strategic plan. We don’t spend enough time looking at what is working and what is not, how much we’re spending vs. how much we’re taking in, and adjusting accordingly. These days the marketplace is changing fast, so if something doesn’t take off in a reasonable amount of time then consider just nixing it because it might not take off at all and there are other parts of your business that you could be exploring.
What top three tips would you like to pass along for those who have just started to use social media? First, ask yourself: What is your “why”? Are you on social media because you want to be famous? Is it to get more business? Any motivation is fine, but you need to be honest with yourself about what it is and then create your strategic plan for whatever your goals are. If you want to use social media to get more business, then you need to add up all of the time you’re spending on it and determine your ROI for that time. Meaning that if you spend seven hours a week tweeting and updating your Facebook and Pinterest pages, how much business do you get from those activities compared to seven hours a week of calling past customers and taking them to lunch or creating a new email campaign? You have to be continually comparing the ROI because social media can be a huge time suck that is often not worth it. Also, you need to realize that the world is getting more and more visual; visual images register in our brains 60 times faster than text alone and are more likely to be shared, retweeted and pinned. So if you are using social media, make sure you are focusing on promoting your brands on Instagram and Pinterest.
Entrepreneurs often say that “you can’t do it all.” What three things do you always outsource? Take some kind of skills test like StrengthsFinder or the Kolbe A Index/Instinct Test. Find out where your strengths really lie. So then it’s not generic thing of saying that you should outsource XYZ; you outsource where you are weak and hand those things over to the smartest people you can find to do them, and then you spend your time doing the 3 – 5 things that you love and are good at and most move the needle on your business.
How do you organize your day to best optimize your time? Describe a day in your life. Plan your day the night before. Structure supports creativity. Make a list of the top six most crucial things, the ones that even if you got nothing else done it would be huge that you got those six done. Make sure you have a set amount of time per week to work ON your business and not just in it – reviewing key metrics and analyzing how much business you have coming in. Make sure you build in time in your week every single week to sell.
And finally, tell us tell us what LIVING THE DREAM means to you: Freedom! Freedom to spend my time how I want to spend it. Period, end of subject. There are times I love to read and research, times I don’t want to do that, times I just love being in the throes of planning events, and other times I just need a break. So when you get to choose whether you work out of an office or take conference calls in your car, whether you’re part of a virtual team or have no employees, whether you start your day at 5a or 10a – it’s all about freedom and choices so you are doing as much of what you want and are good at as you can and then just eliminating the rest. If you can do what you love as often as you want, you’re set.
Written by Marley Majcher