Do you know how profitable your goods and services really are? Do you feel like you’re doing a lot of work but you’re not seeing it reflected in the money you take home?
A lot of business owners will be feeling this pain right now and unsure how to fix it. As a result of the current economy, costs are going up, and you need to raise your prices along with it so you’re not making a big loss.
We recently had a conversation with a client who got into a habit of providing small discounts for customers. At a time when people’s disposable income has reduced, he was worried he wouldn’t get the work in at all if there wasn’t any wriggle room on the price.
As an example, let’s say he was pricing a job at £550. The costs generated to make the sale were £450, meaning he was making a £100 profit. He would agree a seemingly small discount with a customer, and reduce the price to £500 because he needed the work. After all, a less than 10% discount couldn’t really make a huge difference, could it? At least he was getting the work.
What our client didn’t realise at the time of offering the discount, is that it would be literally halving his profit. It may seem a small amount to cut from the original price, but in reality it meant he would have to do twice as much work for the same amount of profit. Twice as much work to provide for himself and his family.
Remember, if the cost of living is increasing for your clients and customers, it’s increasing for you too.
Our client would have been better off pushing back and explaining the situation to his customer. The cost of living has gone up for everyone. For our client, the cost of fueling his van has increased, the amount he pays his subcontractors has increased, and the cost of feeding the family has increased. With a little same-boat understanding it’s possible his customer would have been happy to pay the original price. Sometimes people are just pushing their luck.
Your fears about raising prices are valid and understandable – if you suddenly push the prices up, won’t people think you’re greedy and decide to go elsewhere? It’s easy to think “my customers won’t be able to afford to pay” and you do need to make sure that people can still buy – raising your prices doesn’t mean plucking a skyrocket figure out of the air. But it does mean settling on a price that’s realistic for the current economic environment and realistic for the cost of producing your product or service.
In the current environment people are more aware that running costs are going up for businesses. Inflation is high across the board – fuel, gas, electricity, food. And many businesses are having to increase the amount they pay to employees and subcontractors to reflect this. If you don’t increase your prices alongside inflation, your profit will be going down and you’ll be risking making losses. You won’t be moving forward, but you won’t be able to comfortably stand still either. Because you’ll be competing against other businesses who are increasing their prices and you’ll be becoming less and less profitable in the process.
When looking at your prices, you must factor in ALL your costs (including your time)
When you look at what you’re charging, you really need to have a good understanding of what your costs are, in order to figure out whether the goods or services are profitable for you.
We recently did some analysis on our bookkeeping work to see whether we’re charging the right amount for certain tasks. We suspected we may be making a loss in some areas, but needed to look at the time we’re spending on generating the service to have a true understanding of our position.
Understanding the costs that are driving the work you do or the products you sell is incredibly important – and the most undervalued expense is your time. If you’re a craftsperson, for example, along with factoring in the cost of your materials and equipment, you need to include your time in the calculation. If you’re not tracking time, you can’t possibly know if your product or service is really making money or not.
We’re not suggesting setting up a tedious timesheet process, but tracking the time you or your team spend for short periods (like a couple of days or a week) will generate a lot of useful information. Or focus on a specific product or service and build up a costing list that includes your time.
You deserve to have a business that provides for you
I don’t know who needs to hear it today, but you are no less deserving of a profitable business than the next owner.
If you’re not increasing prices at the moment you’re doing yourself a massive disservice. And we don’t want that for you! So let’s recap:
- If you’re not raising your prices, you will be making less money because your costs will be going up
- In the current economy, whatever you do – don’t discount
- You MUST take all your costs into account – including your time
- You need to raise your prices to make sure your business can thrive
- We’re all in the same boat, and more people will understand the need to increase than you imagine
The first step you need to take is to ensure you have a clear understanding of how your business is currently performing. Get your bookkeeping up to date, or get someone to do it for you. If you don’t understand your numbers, then any changes you make will just be guess work.
