PRICING - basic steps and processes

Pricing is one of the most important factors for a successful business. Here I will pay more attention to the services. It affects the flow of money and if not done correctly, it can undermine the business. Therefore, it is critical to develop a clear pricing strategy and set up a sustainable internal policy to ensure that you receive revenue and generate healthy profits.

The principles we will look at for services actually apply in full force / with some more details / and for all businesses, regardless of their field. The difference is in the details, as well as in production, for example, a little more and more complex calculations are required to reach the price of the products.

There are several factors that play a role in pricing. In addition to the costs of acquisition and processing / manufacturing, the market situation and competition are also crucial.

One approach to pricing is “value-based pricing”, which is determined by the perceived value of the service / i.e. how the customer perceives it /, not by the desired margin or the influence of competition.

Another approach is “cost-plus pricing”, where the price is determined by adding a specific markup to the direct costs per unit of service. This strategy is often taken into account when forming the desired margin.

Below I present several steps you need to go through:

• The first step in pricing is “target group analysis”. Market research offers the right tools for this. In market research, you analyze your audience and focus on the characteristics of this group. With these characteristics, you can estimate how much money potential buyers have for your product and how much they are willing to pay.
• The second step is “competition analysis”. If you know that your potential customers are theoretically ready to pay for your new service, then you need to collect and evaluate information about the competition how things work with them.
• The third step is “determining costs”. This includes all costs that are necessary in order to “produce” / provide the service, including labor costs for the staff who perform the respective work, as well as all costs for managing the business.
• The fourth step is determining the “profit margin”. This is where you decide how much profit you want to make from each sale. The decision should be based on common sense and at least on healthy rates so that the business can survive and invest later. For different areas, this percentage is different, as a practice. You need to look for information in your area.
• The fifth step is considering offering “discounts”. This includes any discounts or promotions that you may offer to your customers. This should be very carefully presented to your audience. Be careful, because if the customer thinks you can sell at a lower price, it will be very difficult to return to the normal rate.

⇒ One of the most difficult things a business faces during the pricing phase is how to calculate the real price of the service. What needs to be added to it and where to get the numbers?

• To determine the price of a service, you need to add the total amount of material costs, labor, indirect costs, and other direct costs to provide the service. These are the costs You incur to deliver the service to your customers, for example.
• Don’t forget that if the owner or the CEO himself / for small companies this is common practice / performs part or all of the service - the costs of his / her labor must also be included. It is very important how you will account for and distribute costs over the different types of services you offer. 
• Think about what basic accounting You have and follow, and how much it corresponds to the movement in your business. If You do not have such a system built, and You want to be accurate in the calculations, You will have to think and implement. 
• After You have calculated the total amount of expenses, you can adjust it by a percentage of the margin to get the price of the service. This is the amount You will charge customers for the service. The margin percentage should cover the net profit percentage and all indirect costs that are not included in the total cost / such as management and sales costs, for example /. 

If You have difficulty calculating the profit margin, you can use the following steps: The profit margin is a percentage that reflects the profitability / how much it earns / of a given company. It can be calculated at different levels, such as gross, operating, or net profit margin. To calculate each level of profit margin, divide the figure for the desired margin / amount / by the profit to the revenue and multiply by 100. Profit is the difference between revenue and expenses. First, You need to determine, as a number, the target of Your desired profit.

When you make all these calculations and when you offer to new or existing customers, you should always keep in mind and it is mandatory to know where the break-even point is. It is very important to know, because if you sell below this level, the business will not survive. 

So, how to calculate your break-even point? - You can use the following simple principles: 

• The break-even point is the level of sales at which costs equal revenues for a given product or company. 
• To calculate the break-even point, the fixed costs of providing services are divided by the price per unit minus the variable costs of providing services. It is important to know that fixed costs are costs that do not change or change slightly regardless of the number of sales. 
• Variable costs are costs that change depending on the number of services sold. For example, if your fixed costs are 100,000 leva, your price per unit is 12 leva, and your variable cost per unit of service is 2 leva, then the break-even point will be calculated as follows: Sum point = 100,000 leva / (12 leva - 2 leva) = 10,000. This means that you will have to sell 10,000 units to reach the break-even point.

Don’t forget one last thing: it is important to compare the price of your service with competitors and market demand. You may need to adjust your markup percentage or total costs depending on competition and the value of your service. 

To compare the price of your service with competitors and market demand, you can use a “competition-based pricing strategy”. This includes choosing strategic pricing points to best use the market for your service compared to the competition. Competition-based pricing is easy to calculate and understand:

• All you have to do is look at the competitors in your market and find the average price they use for their services. From there, you can choose whether to set a lower or higher price or adapt to customer expectations. 
• Don’t forget to take into account the value of the benefit of your service when comparing your prices with competitors and market demand. If your service offers unique features or advantages that your competitors do not have / but be honest in your assessment /, you may be able to sell at a premium price.
• And necessarily, when offering to your customers - show what they pay extra for. Don’t forget to track your expenses during the check, where they are between these levels. 

By following all these principles, you will be sure that your services are well valued and correctly calculated as a price. 

And don’t forget that this process is not one-time. The market situation is constantly changing, the competition is working, and there are also inflationary and other economic processes that change the environment. It is advisable to periodically check and calculate to make sure you are in the right financial position.

Author: Galina Vankova, Ethical Finance GV LTD

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