...is not today's price!
There are 2 weeks left in 2021! Hopefully, you and your team are taking some well-deserved time off during this holiday season. In addition to daydreaming about seasonal cakes and pies, I know that business owners are also thinking about how to step their game up in 2022! This should include a review of your prices. Here's a few things you need to consider to secure the bag.
Cost of Goods Sold. Cost of Goods Sold or COGS describes the amount of money it takes to get your product from its rawest form to a finished good (i.e. "shelf-ready"). These are also called direct costs because you can calculate a direct and final dollar amount per unit of your product (a bottle, a box, an hour). For example: You sell soap for $10 per bar and based on your recipe, the cost of all the ingredients in each bar is $2. COGS not only includes any ingredients, but packaging (bottles, labels) and factory overhead (electricity and labor for manufacturing). For service providers, COGS may be software that is solely used to manage your projects and project labor (consultants, assistants, project managers).
Check the cost of your materials and ingredients. Think about whether you want to give your staff a raise. Then factor that into the price of your final product.
Cost of Revenue. COGS only includes the price to make the goods and get them ready to sell to the customer; but what about the costs you incur after the sale? Often, business owners forget to include the price of getting the product off the shelf and into the hands of their customer. This includes the cost of packing materials (boxes, bubble wrap, tape), printing (if you include packing slips or other marketing materials in the box like coupons), postage, and other courier fees. Many businesses don't think about these fees because customers are typically charged shipping & handling fees to offset the expense. However, if you don't have dynamic pricing tools that change the S&H fees based on shipping location, then you may be leaving money on the table by charging a flat rate. For example: If you are located in New York City and charge the same price to ship 20 bars of soap to someone in Philadelphia as you do to ship to San Francisco, then there's a high probability that someone is being over- or undercharged for shipping. Overcharging hurts your customer experience while undercharging can take a huge bite out of your bottom line.
Analyze your historical financial data and see how much you spent on shipping this year per order. This will give you an average S&H fee per order. You can also check to see if the rates for your courier service have changed. Marrying your internal data with external data can give you good insight into where your shipping fees need to be. PRO TIP: Consider an ecommerce platform that calculates shipping based on the customer's distance from your company. If you are a service provider and clients require you to travel, consider the costs of owning/renting a vehicle and public transportation costs. Some service providers require clients reimburse them for these fees, but you want to make sure you are billing your clients accurately.
Indirect Costs or Overhead. This is your cost of doing business. Basically, you would have to pay these costs if you didn't sell a single product or provide a single hour of service for the entire year. These costs include items like accounting software, website domain renewal, and the salaries of some of your employees that may not work directly with clients (e.g. marketing, finance, human resources). Tying these costs to the sale of a product or service can be tricky. Indirect costs cause the most headache when setting prices because the amount taken out per unit will vary depending on how many units you sell. For example: If your indirect costs for the year are $10,000 and you sell 10,000 bars of soap, then the cost per unit is $1. But what if you only sell 2,000 bars of soap? Then the amount taken out per bar of soap is $5! That's half of the price per bar ($10). If you add that to the COGS ($2), then you are losing $7 per bar of soap if sales are low. Caresha and I do not approve.
Understanding how indirect costs eat away at your profits can help you set sales goals (i.e. "I don't want overhead to take out more than $2 per bar of soap; therefore, I have to sell 5,000 bars of soap next year"). You can also use this to set monthly sales goals by taking your annual goal and dividing by 12. This means you need to sell roughly 416 bars of soap per month in order to hit 5,000 bars sold in a year. That's a whole lotta clean!
Industry & Competitor Standards. Are your competitors selling their products at a significantly cheaper price than you? You may want to take a look. Unless your customers are super loyal to your brand, they may jump ship and buy from someone else if it's the exact same product. If your product or service has a competitive edge, then being a little bit more expensive makes sense. However, you need to be sure your customers understand what makes you different.
Severely undercutting your competition can be problematic as well. If your product is half the price of your competitors', then you are leaving money on the table. Depending on what you sell, customers may devalue your brand if the price is too low. They may perceive the quality of your product or service as subpar compared to your competition. This is important when you sell luxury goods like clothing and fashion accessories. You don't want to cheapen the brand!
Your hard work. You've probably spent this year doing amazing things like getting your company's name out there in these streets, interacting with potential customers, increasing referrals, and everything else in an attempt to let people know what you do and who you do it for. Fantastic. A lot of budding businesses start off offering discounts in order to drum up business and get their name out there. More eyes on your company can lead to more reviews and referrals. This can help support your decision to raise your prices. You and your team deserve to be rewarded for your hard work. Give them babies a raise!
Picking apart your prices can be a bit stressful. You want to make your customers happy, but you still have bills to pay. If you decide to raise your prices, just make sure you communicate. You can grandfather in old or current customers at the same rate and apply the changes to new customers. You can offer occasional discounts or promotions. You should definitely make an announcement. Nobody likes surprises that cost them more money. Above all, you should not feel bad. You've worked hard to build your company; and as long as you incorporate consistent and transparent communication then customers should understand this growth.
My motto is and will always be: If your company hit a glow up, then those prices got to go up!
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