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Our prices determine our market – you are not a victim.

Don’t kid yourself. The market doesn’t determine our prices; our prices determine our market. It’s our fault, not theirs.

There are two reasons people react to your pricing:

  1. Your prices are too high. That almost never happens. Stop thinking you’re the one exception.
  2. Your prices are too low. This is almost always the problem. When your prices are too low, you attract people who are price-shopping, and worse yet, bottom feeders, and both will spend all their energy beating you up because your prices are too high.

Everyone wants value, not everyone is willing to pay for it! There are only three kinds of buying questions:

  1. Price Buyers – How much?
  2. Value Buyers – Can you do it?
  3. Relationship Buyers – Who do I like best?

If you set low prices, you are selling to price buyers and will always hear “Your prices are too high”. If you set value-based prices and are building relationships, you’re going to make a good profit, which will let you serve your clients even better.

Pricing Mechanics – Step by Step

How not to do it – history, fear, feeling, my experience, dreams, hunger, client situation/pocket book, convenience, subjective “analysis”, or “because it’s easy for me to do” (craftperson pricing).

How to do it –

  1. Cost+ – This is the worst way to price, but absolutely essential as a starting place for knowing how to actually set your prices. You must know your costs. If you don’t you’ve got no baseline for pricing anything. You need to know your costs by each individual product/service.
  2. Markup+ – Desired profit = needed markup/margin (50% markup equals 33% margin – don’t confuse the two). Once you know your costs, add a basic profit. This is just the start.
  3. Your Differentiator – what makes you different than the next guy? If you have something, you can price in that difference. If you don’t, you’re a commodity. Don’t be a commodity.
  4. Expertise+ – are you the best in your world? If so, you can demand a premium. If not you’re a commodity.
  5. Client perception (market demand)+ – convenience, coolness, etc. No one runs to catch a stopped train. Get your train moving – get your clients chasing you.
  6. Scarcity/Competition+ – is what you do unique or is the market flooded? If your unique, you can price that in. If not, you’re a commodity.
  7. Hazardous Duty Pay+ – turn low profit, high maintenance clients into high profit, high maint., or fire them. The cost of low profit, high maintenance clients is untenable.
  8. How busy are you?+ – the 95% occupancy rule. If you are more full than 95%, raise prices. (90% manufact.)
  9. Time/complexity+ – are they asking something out of the ordinary? Don’t give ordinary pricing!
  10. History – are you stuck with past pricing? Use #1-9 + new clients to get out of it. Be courageous – raise prices!

Summary

Move from Cost-Plus to Value-Based Pricing if at all possible! Pricing to VALUE – the ultimate objective! In short, stop pricing based on what you think you’re worth and start pricing based on what the market will bear. You’ll make a lot more money and people will whine a lot less about your pricing. Be brave, you’re almost certainly not charging enough.

No Extra Charge:

The Ten Most Common Pricing Mistakes, by Per Sjofors, Managing Partner, Atenga, Inc.
Here is a list of ten of the most common mistakes companies make when pricing their products and services.

  1. Basing your prices on costs, not customers’ perceptions of value
  2. Basing your prices on “the marketplace”
  3. Attempting to achieve the same profit margin across different product lines
  4. Failing to segment their customers
  5. Holding prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences
  6. Incentivizing your salespeople on revenue generated, rather than on profits
  7. Changing prices without forecasting competitors’ reactions
  8. Using insufficient resources to manage your pricing practices
  9. Failing to establish internal procedures to optimize prices
  10. Spending a disproportionate amount of time serving your least profitable customers

Revenue is Not Your Friend – Pricing For Profit

The Sausage Vendor said he bought his sausages for a buck, and sells them for $.95. When challenged as to how he would make money, he said, “No problem, I’ll make it up in volume.”

Business owners focus on Revenue when they should be focused on Profit. If they focused on Profit, they would raise their prices more often.

(This is Part One – The Mind Games of Pricing. Next week we’ll do Part Two – The Mechanics of Pricing)

The old saw is wrong – “If you worrying about sales, profits will take care of themselves”.
Neither Revenue nor Sales are a good place to focus financially – we need to focus on profit (actually cash flow, but that’s another blog.)

What barriers do you encounter in communicating your pricing to potential clients?
Competition, market conditions, aging industry, complex service, fear, not understanding how to price? Probably a little of most of the above.

When we aren’t sold on our pricing, what does that communicate to the potential client? It communicates that all of the above (competition, market, fear, etc.) are all good reasons not to buy my product or service from me. The best way to create pricing problems is to not believe in our own pricing.

A caterer friend gave his “best, lowest” price to a potential client, skimmed of any “excess” profit, and the client’s response was “Is there any way you can go lower?”. When we aren’t confident in our prices, we mentally set up shop in a place that attracts bottom-feeders like the guy above. Getting a lot of pushback on your prices? It’s possible its because your prices are too low!

Joel Spolsky is the co-founder and CEO of Fog Creek Software, said “I often meet people at parties and conferences who are starting companies, and they will invariably ask me, “Say, Joel, do you have any advice for start-ups? Since I know next to nothing about these people or their businesses, or even their industries, I usually just say, “Yes! You should raise all your prices!”

And we both have a good laugh, bwa ha ha, then the founder ignores me. But my advice was most likely right. That’s because almost every start-up I have ever seen has set its prices too low.

Of the three business owner Profiles – Market Focused, Systems Focused, and Product Focused, the Market Focused entrepreneur is most likely to have good pricing, and the Product Focused craftsperson will have the worst. The problem – the overwhelming number of businesses are started by Product Focused craftspeople. (The Systems Focused manager loves accounting-driven pricing that ignores all market conditions; they also start the fewest businesses.)

What makes for the most profitable company? One that focuses on providing VALUE, not COST! Lower prices is not value, it is simply lower prices (and may communicate less value).

FIND VALUE OUTSIDE OF PRICE!

If relationships are equal, there are only two other buying questions – 1) How much does it cost? (price question), or 2) Can you do it? (value question). If you’re getting the “How uch does it cost?” question too often, you’re not focused on adding value or you’re not confident in the extra value you’re delivering. Either one will lose you clients much more than your pricing itself.

What does having slightly higher prices communicate to the customer? We are confident in how our product performs.

How do we get confidence?

  1. Understand the value to your clients. Ask them – why do you buy from me? What are you buying that you don’t think I even know I’m selling? It’s the best question you’ll ever ask them.
  2. Stop thinking about how YOU think you perform (internal/craftsmen view), start pricing based on how you benefit them (see #1 above.)
  3. Get some support – have somebody hold your feet to the fire on WHEN you will raise your prices.

Raising your prices is usually the fastest way to create new PROFIT. If you’re already covering all your costs, then every penny of higher prices falls directly to the bottom line. Want to make more money in less time? This is one of the best ways to do it.

Next week we’ll cover the actual mechanics of how to set and stick with a good price.

Why Product Focused Owners End Up on the Treadmill.

Last week we tried to give perspective to the idea that being the classic Systems Focused owners are great business builders but aren’t such great business starters. This week we want to see why Product Focused owners start the most businesses, but are the most likely to end up on the treadmill.

There are three basic business owner profiles:

  1. The Market Focused owner
  2. The Systems Focused owner
  3. The Product Focused owner

We’re all a mix of all three, but we all lean heavily on a primary profile for the way we manage and make decisions.

Business owners whose primary profile is Product Focused are passionate about the product or service they provide, but usually not about business itself. They are experts, professionals, craftspeople, and artisans; implementers, producers, doers, and finishers. They like being tactical, on the ground, getting things done, and they take great pride in the product or service they offer.

Passion for their “craft”; their chosen service or product, is what drives them to build their business. Product Focused owners have difficulty giving production over to employees (or even having employees), who, in the craftperson’s opinion, might lower the quality. And customers can get in the way because they want to modify the product or service – “I make a great chair, you ought to buy it.” (as is)

The Product Focused owner can’t see the need to waste time thinking about the future or the past. They act on what needs to be done today. They don’t expend much energy on “strategic” planning or action, which is also as a waste of time that could have gone into today’s production. This is a great asset in getting things done on a day-to-day basis, but doesn’t help set them up for future success.

Selling a Great Product by Random Hope is their default business strategy. The product or service itself is so great that customers will simply flock to my door. This product focus keeps them from taking on board good feedback from customers about how to make it more sellable – this feels like compromise to the Product Focused owner.

Their greatest assets are passion for their product/service, the ability to act quickly, creativity in developing and perfecting their product, finishing each task, and a great focus on tactical day-to-day production. Their challenges include focusing more on their product then their customer, doing too much themselves, seeing employees as lowering quality, “rugged individualism” (not getting input or working as a team), and implementing without thinking.

Most new businesses in the U.S. are started by business owners with a strong Product Focused primary profile. However, that same focus on production keeps them from improving the business or planning for the future, leading to stagnation of the business when it reaches the capacity of the Product Focused owner to produce from their own 168 hours per week.

Their biggest issue is actually ironic – They are so busy making money that they never think about building a business that will make money while they’re on vacation. Until they get tired of being the producer, they will be on the treadmill. The Product Focused owner is most likely to spend 30 years producing and end up with a business that can’t be sold because it never grew up.

If you’re a Product Focused owner, and most of us are, get serious about growing a business that will make money while you’re on vacation. Get the influence of the Market Focus in your business to keep you planning for the future, and the Systems Focus to help you build processes and systems that will help you grow a real business. Just because most small businesses are on the treadmill doesn’t mean they should be.

The only reason we don’t grow a mature business is real simple – we don’t intend to.

Be intentional – grow a business that makes money when you’re not around. You’ll enjoy life a lot more.

Why Systems Focused Owners are better business builders than business starters.

Last week we tried to give perspective to the idea that being the classic Market Focused entrepreneur isn’t all it’s cracked up to be. This week we’re looking at why Systems Focused managers are great business builders but aren’t such great business starters.

There are three basic business owner profiles:

  1. The Market Focused owner
  2. The Systems Focused owner
  3. The Product Focused owner

Every owner is a mix of all three, but we all lean heavily on a primary profile for the way we manage and make decisions.

Systems Focused owners are just that – focused on systems, process, procedures, routine. They look at business from the inside out – from the point of view of operations and delivery, not from the point of view of the market or the customer. Make a consistent product at the right margins and you’ve got a good company, so the Systemizer thinks. They’re not always passionate about the particular product or service they’re selling, but they are very passionate about operations itself.

They’re big on research and planning, usually wanting to make sure they’ve thought of everything, and as a result, are usually very risk averse and slow to make decisions. Speed of Execution is not their forte’. They make great managers, administrators, academics, scientists, and engineers. They are absolutely vital to a business growing to maturity, but it’s rarely a good idea for a Systems Focused person to be strike out on their own to start a business.

The Systems Focused person is usually very good at understanding how a business should run, so they think that translates to being good at starting a business.

Rarely.

Because Systems Focused owners are such great planners, this ironically works against them in starting a business. That great research and planning instinct also contributes to their usual great aversion to risk. These two things usually combine to make Systems Focused people very bad at starting a business.

The #1 indicator of success in the early stages of a business is not how great the planning was, how perfect the product is out of the gate, how knowledgeable we are about our market, or how much money we’ve sunk into the project. The #1 indicator of success in the earliest stages of a business is Speed of Execution, which, along with risk aversion, is the biggest challenge for a Systems Focused owner.

Systems Focused owners will miss opportunity after opportunity making sure their operations are well oiled, their marketing is perfect, and their delivery mechanism is seamless. And until they get it right, they won’t pull the trigger. Their unwillingness to move until conditions are perfect (risk aversion) will drain their startup capital and leave them miles behind their competition at every step.

The Systemizer lacks vision for the future (too busy researching the past) and urgency for today’s production. If the Systemizer recognizes their strengths, they’ll get the influence of a Market Focused person to help them keep tomorrow in focus, and the influence of a Product Focused person to help them get a sense of urgency about today – Speed of Execution. If they can do this, their likelihood of starting and growing a mature business will go up exponentially. FYI – they do much better buying a franchise (with good systems in place) or existing business, than starting a business from scratch.

Next week, we’ll talk about the third profile, the Product Focused owner; the one who starts the overwhelming majority of businesses, and has a better track record doing so than the other two. But growing a business to maturity? That’s another story.

Entrepreneurs are the worst at building a successful business

Contrary to popular opinion, Entrepreneurs are easily the worst at building successful businesses.

Entrepreneur – Wikipedia: “willing to accept a high level of personal, professional or financial risk to pursue opportunity. …in possession of an enterprise or venture.”

There are three basic business owner profiles:

  1. The Market Focused owner (the Entrepreneur falls in this category)
  2. The Systems Focused owner
  3. The Product Focused owner

Market Focused owners are just that – focused on what the market wants. They poke around and find holes in the way customers are being served and create companies to fill that need. They’re usually not passionate about any particular product or service, and sometimes know little about the one they’ve just decided to stake their future on. They’re dreamers, visionaries, spontaneous, flexible, willing to take big risks, and understand that speed of execution is vital in starting and growing a business. Entrepreneurs are Market Focused owners.

They’re also more often than not terrible business people. Too often the entrepreneur is lifted up as the holy grail of how to be successful in business, and other business owners are taught to emulate them.

It’s not a good idea.

Market Focused owners need more outside help, are the worst at taking instruction, exhibit the most over-confidence, do the worst due diligence, and fail way more often than either of the other two owner profiles. When they succeed, they succeed big, usually by sheer luck and number of attempts. But just like the gambler, you only hear about that one big win. You never hear of the many losses that, in balance, make the entrepreneur the worst risk to bet your money on. Entrepreneurs are the business world’s big gamblers.

The Wikipedia definition is good – note that it doesn’t mention someone who is a great craftperson or artisan, or highly knowledgeable at making a product or delivering a service. Entrepreneurs are quite often not experts at all at what they’re hawking. They’re great at seeing the hole in the market, but their best bet is to hire someone else to patch the hole.

The carnage they leave behind can be appalling. At their worst, the entrepreneur is a dreamer who causes people to lose their entire life savings on future possibilities and well oiled get rich quick schemes that the entrepreneur is truly convinced is a “sure thing”.

At their best, a heavily Market Focused business owner understands how handicapped they are by their affinity for risk, their unwillingness to really master their craft, their desire to spread their companies too thin and do everything the market wants. The self-aware entrepreneur sees the clutter in their mind and on their desk, and their inability to finish an idea because they already have a newer and better one.

And this awareness leads them to put aside their inherent over-confidence and get help. When they finally get the Systems Focused and Product Focused owner profiles involved and get out of the way (entrepreneurs are classic control freaks), the possibility of success goes up big time.

Michael Gerber (E-Myth) and others correctly identified that most businesses are not started by entrepreneurs. But they then proceed to lift up the entrepreneur as the model for how the other profiles should do it. Good luck with that.

The Market Focused owner may have the most serious issues in building a business, but all three profiles are broken. There’s a fourth profile they all need to become that almost no one starts with – it’s call Business Owner, which is a healthy mix of the best from all three of the other profiles. But more on that at another time.

The purpose of this rant? To free up the overwhelming number of people who own businesses who think the holy grail is to emulate the entrepreneur. Trust me, it’s not something to be pursued. You’ll want to add some of their great strengths, but don’t drink the kool-aid and dive in wholesale in becoming one. It’s just not good for the economy (or for your pocket book, your spouse, your kids, your health…).

FYI – the next two weeks I won’t need to be nearly so hard on the other two profiles (Systems Focused and Product Focused) because they’re rarely so over-confident as the Market Focused owner. Fortunately very few business owners are actually Market Focused entrepreneurs. Be thankful if you’re not one of them, and if you are, get help focusing on Systems and Production so you can become a true Business Owner.