Conversations about Money Series
This is part three in our conversations about money series, for part two, click here.
The first obstacle is that the more difficult the situation, the more unlikely you are to have these conversations. And unfortunately, these are the times when you need them the most. The second is that even if you decide to talk about it, you often don’t have anyone to talk to. You may have an in-house team but that doesn’t mean you’re going to have these difficult financial conversations with them. So, you begin to wonder—Who else do I have that I can trust will give me the information and advice I need most?
It’s important to understand that these concerns are extremely normal and even more significantly that you don’t have to face them alone. It’s about having a supportive network that allows for honest conversations and collaborative problem-solving. To get started, we’ve decided to develop this “Conversations about Money” series, where we are going to answer some of the questions you may be thinking about right now. Our hope is that while this is not an actual conversation, it will spark a light for you to see the benefits of talking it all through with someone who truly understands.
One of the most common concerns I hear from business owners is about their pricing and specifically if they are charging appropriately or need to raise their prices. And it’s with good reason. Setting the right price for your products or services is crucial for maximizing profitability and staying competitive in the market. But determining whether you’re charging appropriately or if you should increase your prices can be challenging.
Three Tips to Optimize Your Pricing Strategy
While resolving this issue can be difficult, it doesn’t have to be as daunting as you may think. Setting and revising pricing is an ordinary part of being a business owner. And it is an important one. Here are some tips to help you assess and optimize your pricing strategy:
Tip 1: Conduct Regular Market Research
Many of the business owners I speak with don’t even know where to start when it comes to pricing. To that, I tell them it’s thorough market research. And while many tend to think of market research only when starting their business, it must be done on an ongoing basis. Industries change, the economy ebbs and flows, and competitors drop off while others emerge. Staying informed about all this is one of the most effective ways to make data-driven decisions about your pricing strategy.
Conducting market research typically includes the following:
- Monitoring Industry Trends. This is where you can better keep track of industry trends, economic conditions, and changes in consumer behavior that may impact pricing decisions. Factors including inflation, supply chain disruptions, or shifts in demand patterns can influence not only the pricing dynamics of your market but also your own pricing. You want to ensure that you can adapt your prices to align with evolving market conditions.
- Conducting Competitor Analysis. You likely already know your competitors (if you don’t, you want to find out about them), so take a look at what they are charging. This should be more than a cursory glance though. Analyze their pricing structures so you can compare factors such as product features, quality, and value proposition relative to their prices. It will help you gauge where your prices stand in the market and whether adjustments are necessary.
- Gathering Consumer Insights. Consumers are the ones who are purchasing your products or services. As the ultimate user of what you provide, their insights are extremely important. And while you may be thinking that they will never tell you to charge them more (and you are probably right), it’s about reading in between the lines. You want to understand their perception of your pricing in relation to the value they receive. Ask questions about willingness to pay, perceived affordability, and comparison with alternative options.
Tip 2: Calculate Cost-Based Pricing and Profit Margins
Without a clear understanding of costs, many business owners are actually losing money without even realizing it. A fundamental aspect of your pricing strategy is ensuring that your prices always cover your costs while, at the same time, generating a good profit margin. Cost-based pricing involves calculating both the direct and indirect (this is where some get hung up) costs associated with producing your products or delivering your services. To determine if your pricing is appropriate based on cost analysis, you first want to break down all the costs involved in your business operations, including raw materials, labor, overhead expenses, and marketing.
Next, you want to evaluate your current profit margins to assess whether they are in line with your business goals and industry standards by comparing your gross and net profit margins to industry benchmarks. It’s important to note that your profit margin should be calculated based on 20-30% of the total price, not by adding a percentage to costs. This common mistake often arises when individuals fail to consider the entirety of the transaction. Instead of merely tacking on a certain percentage, it’s important to calculate the profit margin against the total amount.
Tip 3: Continuously Monitor Prices and Communicate Changes
Just like market research, pricing is not a one-time decision but an ongoing process that requires constant monitoring and adjustment. Keep track of your sales performance, customer feedback, and market dynamics to identify opportunities for pricing optimization. This should include scheduling regular reviews (quarterly or bi-annually) of your pricing strategy to ensure it remains aligned with your business objectives and market conditions. If, during one of these reviews, you decide to raise prices, make sure to communicate your decision transparently to your customers to maintain trust and minimize resistance. Clearly articulate the reasons behind price adjustments, such as improvements in product quality, enhanced features, or changes in cost structures. They may not always like to have to pay more, but if you communicate clearly and continue to provide value to them, they likely won’t object as much as you may think.
When it comes to money, it’s not just business, it’s personal. I understand that it takes an enormous amount of emotional bandwidth to deal with concerns like these and want to learn about the experiences you are having. I want to work with you to change your narrative around money and make sure you are making money for all your hard work. So, please pick up the phone or send me an email and let’s talk about it. Let’s have the conversations you need to have—no judgment, no embarrassment; just support and guidance.
At Agile Planners, we provide strategic guidance and outsourced CFO services to companies of all sizes. We can help provide the strategy your organization needs for the growth you want. We understand that no two organizations are the same. And with our experience and financial knowledge, we can help develop the right strategic plan for your business to grow and reach its goals. Simply, we’ll be your trusted partner, so you can focus on running your organization. Contact us today to learn more about how we can help.
