I was talking to a friend recently who was very excited because she had 5 new custom orders. She had only been in business a few weeks and this was really cause to celebrate!
Then she asked me how she was going to find the time to fulfill on the orders.
Uh oh. Red flag!
As we began to talk, it quickly became apparent this wasn’t a time management or fulfillment issue. This was a pricing issue that could upset her entire business model if it wasn’t addressed NOW.
Her product line? The one that just received 5 new orders? It was putting her in the red.
I see this too often in business. Sales are great – but the money just isn’t there.
This is often (but not always!) a pricing issue. It may sound like a no-brainer – but your own business is often the hardest to see.
Pricing is tricky. You have to charge enough to make a profit – and not too much or you might leave money on the table.
There are many ways to determine what you should charge for your products and services including:
- Competitive Pricing looks to your competition
- Premium Pricing is based on prestige and results
- Value Pricing often comes into play with large quantities
- Referral and Incentive pricing reward customers
- And the list goes on….
One of the most common pricing strategies is Cost Plus pricing. It’s pretty simple, and very eye-opening. Basically, you calculate what it costs you to produce a product or service, (your variable costs – Cost of Goods Sold, or COGS) and mark it up so you earn a profit.
What many people fail to realize – and what bites them in the end – is that YOUR labor is a COST. I find most new entrepreneurs (and some seasoned entrepreneurs as well) consider their labor as profit.
This doesn’t work on many levels. Your time is a commodity! It is a cost to your business.
You can’t close yourself (although wouldn’t it be great if you could!!), so if you are fulfilling on an order or a contract – you aren’t available to do anything else.
My friend was investing 4-5 hours of her time on each new order. She chooses not to hire this work out because it is her passion. That is fine.
What isn’t fine is that she is mentally putting the money in her “profit” category.
With a little quick math I showed her that her hours were a cost of doing business, AND she was losing money on each product she sold!
With that understanding, she can decide on her course of action. Basically she can:
- Raise her prices on her custom orders.
- Use them as a loss leader to earn more sales from those (and other) customers.
- Focus on making her other streams of income more profitable so she can afford to do the work she loves.
I recommended the choices I would make, (while recognizing it is her business and her choice). Based on her input, we worked out a game plan to keep her business moving forward and making money – so she can STAY in business!
Fortunately, she sought business advice within a few weeks of starting her business and was able to prevent a potential financial disaster!
As they say – knowledge is power.
Are you making money in your business? If not, have you calculated your costs properly, allowing for your labor AND a profit?
The main reason businesses close their doors is lack of money. This breaks my heart, because with proper planning – you can avoid this pitfall.
I’m not sure why people avoid financial planning and projections when it comes to business – to their livelihood! It doesn’t have to be difficult or complicated. You just need to know a few simple things:
- Cost of Goods Sold
- Sales Price
- Profit (in $)
- Profit Margin (as a %)
There are a lot of good free resources out there to help you assess your profitability. Please invest your time wisely and do the math before you run out of money!
If this is an area you struggle with – let’s talk. Comment below or shoot me an email and let’s put our heads together to help you figure this out!