Episode 44: Are you pricing for a Toyota or Ferrari
March 7, 2022
Noticing a theme this season? If you haven’t yet listened to the previous episode on break even analysis- STOP WHAT YOU ARE DOING- and listen to that one first. This is a follow on episode that works through how to price your product/service. The break-even point is a large part of this, however, given it's IWD, Trudi and Sarah also talk about why women often under price/value themselves, the importance of research and making sure you factor your own wage into the pricing of your products. After this episode you should have a good understand of whether you have gotten your pricing right, or whether it is time for a review to make sure you are charging your worth.
Podcast Transcript Available Here
Duration: 28:56
Trudi Cowan: Welcome to season three of the Financial FOFU podcast where we talk all things finance, money, and mindset. To find out more about us or to listen to some old episodes, you can visit us on our Instagram or Facebook pages or check out our website. So let's get into it today. Sarah Eifermann: Welcome to today's episode of the Financial FOFU podcast, we are talking about how to price your product or service today. Trudi Cowan: A very important topic for us to chat about today. Sarah Eifermann: I think when we consider what we're going to talk about this season, this was one of the main topics we really wanted to discuss because it's fundamental. Trudi Cowan: It is, but it's also very difficult. Sarah Eifermann: Yes, a lot of people really struggle to price their product or their service. Today, we're going to break it down into why that might be and what you can do to change that. Trudi Cowan: Yes we really are and look, the first thing that you should do when you're looking at pricing your product is some research. Whether that be looking at other products in the market that are the same or that are similar, or where you put it your placement in the market is and what others around you are doing in terms of pricing. It's actually a really good place to start when you are looking at pricing your own products. Sarah Eifermann: I think the important part is to really get a good understanding of what will the market pay? What will this cost me?, and what can I then sell it for? Trudi Cowan: Yes and without doing that bit of research, it's very hard to answer any of those questions. Sarah Eifermann: Yes, absolutely. Often people do some of the research, but they don't do all of the research so they might know that, they can sell it for a certain amount of money. But then, they haven't necessarily done the research as to what it costs them to provide. So selling something, and I actually have a YouTube video that talks about this, if you want to go to YouTube and search my name. If you sell something for a set price, but it costs you more than the set price to make it or provide it as a service, Trudi Cowan: That's not viable. Sarah Eifermann: There's no point in you doing it because you're not going to make any money. Having a real understanding of stuff that we've talked about, from a break-even point of view and in our planning and forecasting episodes, they really impact. It's like mutually inclusive, they don't exceed these things can't be excluded in business. You can't just do one and not the other and be successful, you have to do all of them. First off, research how are you researching your product as well. When I research something that I want to sell, I usually go straight to Google, most of us do. I also then go to local groups or business groups, and try and get an understanding of viable prices and price points. And I then talk with my peers, who are my prospective clients. I don't talk with my peers, who are just my friends that I ask, or what do you think of this? , or would you pay for this? because the reality is that their response isn't actually tangible for your data set. Because it's going to buy a few [crosstalk (03:37)]. Correct and that's a common one. Sarah Eifermann: I see it a lot with other things like even with branding and logos, we asked all of our friends who are in the construction industry, what they thought of our logo and I was like, why? They're not your clients, they are your peers like there's a difference. They're your competitors even, at times. So when you doing your research, it's not just a quick Google search, it's usually in-depth. It's got a process that goes to it. You're looking for tangible data, that you can use that data towards your budgeting, your pricing, and your cash flow forecast to really get a good understanding of how much it costs you to make, break and sell. Trudi Cowan: I guess even before that, you need to already have had a good understanding of who your customer is and where exactly your product sits in the market. Are you planning on making a premium product? Or is it the cheaper one? We often use the example, are we providing a Toyota? Are we providing a Ferrari? And where you sit in the market is also going to impact the pricing of your product. Sarah Eifermann: Exactly and that's why research and we've talked about this before, research, research research. Like, I know, it's boring. It's not the fun stuff. No one wants to do it but it is the difference between you being successful and making a profit, plodding along, and really robbing Peter to pay Paul, just to get by. Trudi Cowan: Yes and I suppose to go back to that Ferrari example. If you are pricing as a Ferrari, but you're only providing the Toyota, you're not going to make many sales because the customers aren't going to be happy, and you're not going to get the good reviews that you need to get the repeat customer or to get the referral business. Vice versa, if you're pricing it as a Toyota, but you're providing a Ferrari, well then you're selling yourself short and you're providing amazing products, but not charging what it's actually worth. You could be making a lot more money, than what you would be pricing in the Toyota range. Sarah Eifermann: Completely, Trudi Cowan: Again, it becomes really important for the profitability pricing ross. because I don't know about you, if I was paying for Ferrari and getting a Toyota, I'd be very unimpressed. Trudi Cowan: I think most people would. Sarah Eifermann: Exactly. So the next point that we'd like to bring up I Sarah Eifermann: Absolutely, completely and fair comments in those regards, s a little bit contentious. It's something that women specifically struggle with, and it's gender-related in terms of, are we getting in our own way as women when we price our services or our product, in a way that men don't? Trudi Cowan: Yes and I think that it is very common for women to undersell themselves, and undersell their worth whether that's because they don't feel that they deserve to be earning that kind of money, or they just don't have the confidence in their own ability, skills or the product to be asking for that large amount of money. But it is very common in women or female-related businesses that we under price ourselves. Sarah Eifermann: Is it just because we don't feel that we can get paid what we know we're worth, and therefore will ask for less to validate that we are still worth something? Trudi Cowan: Very possible. I think a lot of it is a confidence thing. I mean, if you look at job applications, they say that men will apply for a job that they have half the skills for, but women will only apply for jobs that they have 90 to 100% of the skills for. Sarah Eifermann: Yes. Trudi Cowan: It's the same type of confidence, confidence difference between men and women when it comes to pricing our products, we probably don't feel that we're worth the money, or we should deserve that kind of prize or reward for the product or service that we're providing. So, therefore we charge a lower price. I mean, I know a lot of female advisors who seem to be going, I'm just not sure if the customer is going to pay that, I'm not sure if I'm going to charge too much money. It's not, It's not, you know what, I don't want to price too high. And there's a difference between[crosstalk (08:13)]. Sarah Eifermann: Will the market pay me this? And will the market pay me this, because I'm not sure that I'm worth this? Because if you have done your research, you should know the answer to the first question. Trudi Cowan: Exactly, Right and if you know the answer to the first question, then you should have the confidence that I am worth this, therefore that is what my price is. And if you think that's too high, then I'm probably not the right fit for you and there might be someone else who's willing to provide cheaper service for you. But you need to be willing to go that, I am providing service at this particular level, and therefore the value of that service, is this price and therefore be willing to charge that. Sarah Eifermann: And I think as well like, especially if you've got a new service or product that you're offering is that you try and win every sale, but not every sale is the right. Trudi Cowan: Is worth winning and look, I did that when I first started my business as well. It was you know I charged a price that I thought that I could get customers in and do the work for them. But I'm now at a point where I feel like I've proven myself and I'm like, I should charge based on the service and the quality of the service that I am providing to my clients and stop underselling myself. I am more confident when I'm quoting clients now, that this just is the price and some will come back and say that's too expensive and that's fine, but that is what my price is. Sarah Eifermann: That goes to the next point though. It's not even about when you set your prices to start with. It's about when you review your prices within your business and ask your existing client base for more money. Yes and another interesting, difficult conversation [cross talk (10:05)]. Trudi Cowan: I spoke to a male accountant a couple of weeks ago, and he said since he started, he has raised his prices 10% every year without fail. And he goes, there's no email going out, flurry email saying I'm putting out my prices and let me know. And right, he goes, I just put it in the engagement letter. And that's what the price is. And he goes, I haven't really had any customers complain about the price increases. And I figure that I'll know that I've gone too far when they start to complain. Sarah Eifermann: Yes Trudi Cowan: Is me who has. I have put prices up over time. But it's not a very regular thing? It has been tied to, can I charge that much? And am I worth that much? And is that Sarah Eifermann: Whereas, when it's just a consistent 10% increase, that's done annually every year, it becomes expected by the customer that it's not going to be the same price as last year. But you don't [crosstalk (11:02)] have that conversation? Trudi Cowan: No, that provides a really useful example of two very different ways of approaching pricing. And very possibly his is better because as you say, it is just consistent and unexpected by the customer. And if they have a problem with that, they will comment. Sarah Eifermann: So the question then, back to what this particular portion of the topic is about. Is he doing that because he's a man? And you're not doing that because you're a woman? Or is it just a natural personality? Differences in approach to business? Like, we'll never know the answers potentially to that. Trudi Cowan: It's probably a mix of all of those things. Sarah Eifermann: Really, yes. So how much self-sabotage is going on there for you Trudi, within pricing and increasing your pricing? Even, is to your own detriment and to your own value, but also in a way that is keeping clients that you perhaps shouldn't be keeping anymore, either. And pricing is a good way to sort the wheat from the chaff. Trudi Cowan: Oh, very much so. Sarah Eifermann: The wheat from the chaff, I should say to weed out the different price. I mean, I had this in December, January where I reviewed my pricing for a range of reasons. But because of what I'm seeing in the marketplace, I was a third of the price offering five times the value going, this is not, busting my chops to provide that value, because I believe in providing service and value. But they're not necessarily getting remunerated at the same level as some other business coaches or advisors were being remunerated. So I moved one of my packages around and increased my price. Had a bit of push back from a few people, but if they see value in what I'm doing, we're actually able to tangibly show them the value through the changes in their profit and loss statement, which we are. Then it's a cost that they will need to include as part of their natural expenses of doing business because it's providing them value that they cannot find on their own when they were paying more for the previous advisor. Trudi Cowan: And the other thing to factor in as well is that yes, maybe you will lose a couple of clients, but you're going to be earning more from a smaller, better quality group of clients. And the other thing this brings us back to is an example we actually talked about when we're talking about this episode is and I can't remember who the speaker was. But I heard a story of a female speaker who did a talk with three or four other men in the session. And at the end of it, the lady who was organizing it spoke to her and said that we nearly didn't hire you, because she was so much cheaper than the men that we thought maybe you weren't very good. Yeah. So it's also actually important to price yourself well enough. So that it is reflective of how good you are. Because otherwise, people can actually have the opposite opinion. Oh, you're too cheap, so maybe you're not actually good. Sarah Eifermann: Yes, that was very impactful for me when we talked about it because I was pricing knowing what it's like to be in business, because I've been in business, and knowing how hard it is for cash flow and the works. But then, part of me said, all these other advisors in the space are charging two to three times what I'm charging, and they've got consistency of work coming in. Not that I don't, but they're charging two to three times and offering less service. So, therefore my workload is higher earning less. So I looked at that, and went that is a really impactful comment, is how am I presenting to the marketplace then, if I'm not charging on par with them? You know, all of that was a factor in the decisions that I made earlier in the year. Trudi Cowan: And perhaps you were doing the Toyota pricing on the Ferrari. Sarah Eifermann: I was offering them a Toyota, sorry charging them for Toyota and offering them a Ferrari. Trudi Cowan: Which is, which again, is something to really consider. Do you need to include all these extra add ons in your offering? Or is a core thing enough and the extra add ons are worth more? If you're a product, are you including shipping in the price, or are you adding on shipping? And if you add, including it in the price, have you actually factored that in properly when doing your costing, to price the product appropriately? So you know, are you basically getting remunerated for that shipping cost as well. Sarah Eifermann: To be fair, I would rather pay more for a product and not pay shipping. Trudi Cowan: So do I Sarah Eifermann: I pay less for a product and then have to pay the $10 extra for the shipping. Trudi Cowan: I think it's very psychological. Sarah Eifermann: It's 100% psychological Trudi Cowan: But I'm totally, with you. I'll go with the free shipping every time. Sarah Eifermann: Yes, I'll go with the free shipping, if it means I need to spend a little bit more than what I was planning to spend. So if it was a 50 or $100 spent, I mean, depending on the product. Recently there was I bought a scrub and a little bit off-topic but the scrub was $22, the shipping was $10. And I was like the shipping is half the product price. I was like, alright, so I'll buy. And they had like free shipping, I think, no, they didn't. They used to have free shipping at $50. So I put three in my cart to get over the 50 bucks and then it was no free shipping. And I was even madder because they used to offer free shipping and now they don't. I don't mind spending a little bit more. I understand shipping is what it is. It's a cost to the business. Sarah Eifermann: But I would have rather paid $27 for the scrub times two. So the shipping still would have been the same for the business owner, spent over $50, they would have paid for the shipping by increasing the product price. Then me having to pay less and pay the shipping. And so I ended up, I was like in that case, I might as well buy three to justify the shipping cost. It now means though, I won't come back and buy anything from that business until I'm 100% out of the three times the same product that I bought, the scrub. Trudi Cowan: Yes, to justify the shipping costs. Sarah Eifermann: Because I won't go back and I won't buy their skincare, their hand cream or which are beautiful products because I don't want to pay the shipping. So all of these things are really relevant and come back to market research and the psychology of selling, when you look at any of these things, for how you price your product or your service. Trudi Cowan: Yes and again, it's different on how much you're spending. If I'm going and buying a $200 product, I'm more willing to spend the $10 on the shipping. But as you say, if I'm only buying a $20 Scrub, you're less willing to spend that $10 on shipping. So again, it's relative to your particular product and the pricing around your product. Sarah Eifermann: Yes. Absolutely. So some of the other things that we have listed for how you're pricing your product or your service, is break-even analysis. Trudi Cowan: Yes and we had a good chat about that last week. Sarah Eifermann: So if you haven't listened to last week's episode, stop listening to us now go back and listen to last week's episode and then come back right to where we are here. Because break-even is game-changing? Trudi Cowan: Yes and we had a lot of fun playing around with the numbers last week. There is a spreadsheet downloadable on our website that you can use to play around with some of your own numbers. But it's a really useful analysis to work out. You know, how many products do I need to sell at a particular price point in order to cover my costs? And you can play around with a spreadsheet in terms of what that sale price is so that you can figure out where do I need to be in terms of pricing from a cost perspective to cover my costs? But also, you might know realistically how many units you're likely to sell, you know, are you selling a product that you're going to sell 10 units off, or if you got a product that you expect to sell 1000 units of and you can play around with that in the spreadsheet in terms of what an appropriate pricing point might be for you. Sarah Eifermann: Yes, absolutely. Definitely jump to financialfofu.com.au and go into the episode, break-even analysis and download the downloadable there. We're offering that to you as a little gift. It's game-changing. It is set up at the moment for a product and then a service business, but it's a construction service business. If you're a professional service, you just need to not have to worry about the materials in the variable cost section because you won't have materials in the same way that a construction-based business has materials as a job cost, cost of sales, or direct cost, whichever jargon term you're using, because [inaudible (20:11)] Trudi Cowan: You might instead choose to include some labor costs, or your software or whatever the major is, at that variable cost. Sarah Eifermann: That one is huge, then when you combine that with the research with your break-even analysis because you know what the market will pay, and then you know what it will cost you to provide. And then you can really decide, Is it viable? Can you sell it for what you need to make a profit? And then, you know, even the breakeven analysis, if you decide you want to make a profit margin on the top, you've got the capability to add the profit margin on top because a lot of people don't realize when they're looking at their financials. And in our next episode, we'll be talking about this a little bit more between cash flow management and budgeting. And our second episode of the year, talk specifically about understanding your books, but profit on the end of a profit and loss statement, if you're not taking wages isn't profit. Profit at the end of a profit and loss statement, if you haven't included depreciation or other things is only a cash profit. It's not a paper profit. And all of these things impact your ability to make money. Trudi Cowan: If we're not making money, then why are we doing it? Sarah Eifermann: Exactly. If you're not making money, why are we doing it? Making money is not the only reason to be in business. We're not suggesting that. But blood, sweat and tears, a decent amount goes into being self-employed. You live, breathe and eat self-employed life. You're on your phone all the time checking messages, answering client calls. You don't get to leave the office in most instances at 5 pm and not think about working until 9 am the next day. If you're not making a profit, why are you in business? Can't say that enough, probably say it a billion times between now and the end of this season. But if you're not making a profit, why are you in business. Now, you need to decide what profit looks like to you. If profit equals a replacement wage for you working some for somebody else, that's okay, too. But make sure you're at least making the same as a minimum as what you would make if you'd work for somebody else. Trudi Cowan: The reality is most people go into business because they want to work for themselves and make money for themselves rather than working for someone else. Looking at what your wage would be if you're working for someone else is a really good starting point. Sarah Eifermann: Living wage Trudi Cowan: Yes, living wage is a great starting point in helping to work out your pricing and how much profit you need the business to make. If we go back to our example, on the spreadsheet of the phone cover, we've got an example of a $40 sale price, which needs you to sell 1225 units to break even. So you need to sell more units than that to even start making a profit. So if you know that you're only going to be able to sell, let's call it 2000 units. Well, you can also then work out that you're only going to make a profit of 31,000. Now maybe that's an amazing amount of money for you and that's all you're wanting to earn from this business. But maybe that's not enough for you, so it's really useful to sort of use these calculations to factor in your pricing of are you earning enough wage or profit based on the pricing of your products as well?. Sarah Eifermann: Trudi, I get asked all the time, what's a benchmark or an acceptable profit margin? Trudi Cowan: It depends on what you want and what type of business you are in. Sarah Eifermann: Exactly. So for me, it always goes with well make a wage, and then it's a wage. So your profit is actually profit, not reimbursement for a living wage. So it depends on the industry too and it depends on how clue you are in your marketing, your advertising your efficiencies, getting your other costs down because if you get them for cheaper, all it does is give you extra cash, right? bump your profit up. But you could probably work on a 15 to 20% target. And if you're making 15 to 20%, you could probably say you're doing well. If it's a profit margin, above paying yourself a replacement wage with industry, synergy or comparability so if you're a professional service provider, you may earn say $120,000 if you were employed. If you're earning $120,000 as a wage and making a 20%, profit, you're doing well. And I say net profit. So net profit after all of your expenses, you're doing well. So for those of you that are sitting there thinking, I wonder what do everybody else aims for? Aim for that, that's a good place to start, you can only go up from there. At the end of the day, if you make a 40% profit, we want to hear from you. Trudi Cowan: We want to talk to you. There are lots of other factors that go into it as well. I've got clients who want to earn enough from their business that their spouse doesn't have to work or I've got clients who, this is just something to keep them busy for a couple of days a week, so they just want to earn enough money, that would be two days worth of wage. And I've got clients everywhere in between, as well. So, you know, there is a lot of personal circumstances that come into it always, as well. And for some people, 50,000 is a great wage for other people they wouldn't run a business unless they were 80. And it comes down to what we're just saying, what would you be earning otherwise if you're in a job? And what do you feel that you need to be remunerated for all the effort that you put in and the time that you put into your particular business? Sarah Eifermann: And on top of that, what are your business plans? because if you want to grow your business, you're going to need cash to invest or reinvest into your business, to enable that growth, whether it's in bringing on more staff or purchasing other pieces of equipment or goods that you need, even if it's just funding supply chains so that you can grow. That's what your extra profit then provides you with the capability to do it's the choice as to how you want to spend it. Trudi Cowan: Yes, so if you are wanting to grow or invest, you need to make sure that your profit is large enough that it's going to cover those costs from a cash flow perspective. Sarah Eifermann: Yes, which means you need to have done some planning to work out what those costs would be. Trudi Cowan: Yes and that's on top of you earning a wage, not instead of. Sarah Eifermann: Exactly. All right, so if you haven't spent any time recently, looking at how to price your product or service, here's your not so gentle reminder. So foot in the butt from us to go back and have a look at how you're pricing your goods and whether or not you're actually making a profit from the pricing of those goods. Trudi Cowan: Yes and I will be doing it this year as well. So I'm keen to hear how everybody else is going with reviewing their pricing or starting out with the pricing of their product or service and how hard or easy they found it and what are some of the factors that have influenced their decision, have been. Sarah Eifermann: Yes absolutely. If you've got any questions on this, please feel free to reach out on the social media website. You've got our numbers, let us know. Trudi Cowan: We'd love to hear from me. Thanks, everyone. Sarah Eifermann: See you later. Bye. See you next week. Bye. Announcer: Thanks for listening to this week's episode of Financial FOFU. We really appreciate you tuning in and hope that you have subscribed to our channel. I just wanted to let you all know that the information and material in our podcast and any supplementary and associated information available is for general purposes only. 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