Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with @EllenRohr. Ellen Rohr, Business Make-over Expert is President of Bare Bones Biz, Inc. As president of Benjamin Franklin Plumbing, a home service franchise company, the company grew from zero to $40 million in sales and 47 locations in less than 2 years. Now, she helps entrepreneurs start, fix and grow their own profitable businesses. Her basic business strategies work…from Main Street to Wall Street!
SmallBizLady: If I do what I love, won’t the money just follow?
Ellen Rohr: Probably not. A better plan is to charge more than it costs! To do that you, have to know your costs. You have to believe in the value of what you are selling. And you have to believe that you deserve to make money in exchange for what you bring to the transaction!
SmallBizLady: Don’t you have to set prices based on what the market will bear or on the going rate?
Ellen Rohr: Most businesses go out of business. Most business owners make less than they did when they had jobs. (Stats available at www.sba.gov) So, you don’t want to blindly follow the leader. Instead, consider what your costs are, and how much money you want to make. You might notice that industry leaders are often the highest priced providers. Starbucks. Kinkos/FedEx. They sell on value, not price. Exception is Walmart, but that’s a tough USP to compete against.
SmallBizLady: So, how do I come up with a better selling price?
Ellen Rohr: Put a simple budget together. What do you want to spend for one year on expenses, including a good salary for you and great wages for your team? Add up all the costs. Then, create a sales goal that is bigger than that to the desired amount of profit. Yeah! Now, you have financial goals. From there, divide the top line of sales into per item/per hour prices. For instance…if your sales goal is to hit $300K per year and you work all by yourself and deliver a service. Say you can work 1,000 hours per year. You would need to bring in an average of $300 per hour. That’s the basic approach for a sound selling price strategy. If you sell products, play out a few options. Easy peasy.
SmallBizLady: What if my financials are a mess? Do I have to become an accounting pro to figure this out?
Ellen Rohr: You have to get the financials right and current. We call this operating at KFP – a KNOWN financial position. When the financials are current and accurate, you can see the evidence of your decision making…including your selling price strategy. If you don’t like the score, change a behavior and see what happens. You may need a bean counter or QuickBooks expert to help you clean up and understand your financials. (I help folks do this, too, and that’s why I am so busy!) You don’t have to be a bookkeeping pro. You DO have to understand the Balance Sheet and Profit & Loss. It’s your money and you should know.
SmallBizLady: Can I just ask my bookkeeper or accountant to figure it out for me?
Ellen Rohr: She or he can help! But, YOU are the financial manager. Again, it is your money and your stewardship. And, if you aren’t paying attention, you increase the risk of getting ripped off. The good news? This accounting business is not that hard. It doesn’t take that much time. You just probably never learned it. The words are weird but it is all pretty common sense-ical. 🙂
SmallBizLady: Most people are scared of budgeting and goal setting. What is your simple, step by step process for making budgeting easy?
Ellen Rohr: If you are operating from KFP or KNOWN financial position, that is a good start. Then, create a pretend P&L based on the Chart of Accounts you are using. I like using an Excel spreadsheet. It’s just one step up from a columnar pad and a calculator. The math is easy…Sales – Expenses = Profit. When you think of budgeting like goal setting, it becomes more appealing. Less deprivation. More abundant thinking! It’s all pretend, so play out a few scenarios and get your head wrapped around how nice it will be to have more money, more options.
SmallBizLady: How does a competitor stay in business when they charge less?
Ellen Rohr: There is a four letter word for it: DEBT. Or, maybe they won the lottery. We don’t KNOW how some people stay afloat when they are charging less than it costs them. Basically, the difference between a high priced provider and a low cost provider is what they pay their people. And debt can allow someone to stay in business for a lot longer than they otherwise would. So, consider what YOU want…and let go of the need to compare yourself with the competition.
SmallBizLady: What if I am selling the exact same thing?
Ellen Rohr: In order to charge more, you have to be more. Cleaner, faster, nicer…whatever! If you are selling rice, differentiate that rice. Is it organic? Can you deliver it faster? Is it stored in a superior way? Then, you can charge more for it. Unless you can differentiate, you are in a commodity crunch. Break free by coming up with 12 ways YOUR product or service is different and better. Not sure of the ways? Ask your happy customers! Then, leverage these benefits in your marketing and sales communications.
SmallBizLady: Most business owners think if they raise their prices, that they will lose their customers. Is this true?
Ellen Rohr: You may. You may only lose the most troublesome customers and that’s not a bad thing! In my experience, if you double your prices you may lose 5-10% of your customers. Not half your customers. Even if you DID lose half your customers…you would still be ahead of the game, right? So, fear not. A budget helps you believe in your updated selling price. For me, when I crunched the numbers, I realized I was charging much less than it cost me for every hour of labor I sold. It made it easier to stand tall and present my prices as being fair and reasonable.
SmallBizLady: How does an entrepreneur/business owner get their team in on the game?
Ellen Rohr: If they don’t buy it, neither will my customers. Try Open Book Management. My mentor for this is Jack Stack, www.greatgame.com. Basically, sharing real financial data can help your team believe in your budget and your selling prices. It is a bit nerve wracking to get started. Show them a few, relevant numbers…like sales, direct costs of labor and materials, and marketing costs. Whatever you share, tell the truth. You build trust and increase buy-in for your selling prices.
SmallBizLady: What is your advice to help business owners triple their prices and keep customers?
Ellen Rohr: Mark Victor Hansen says, “You can raise your prices as often as you raise your self esteem.” When you allow yourself to fully grasp the value of your goods and services, it is easier to raise your prices and hold to them. If you are willing to improve your marketing skills and selling skills, then you are off to the races! Many folks who tell me how hard it is to raise their prices have never taken a sales class. How about you? Start with that. Check out… www.buygitomer.com or www.tomhopkins.com for a couple of rockin’ sales trainers. Harry Beckwith’s book Selling the Invisible is a good start for marketing help. And Jay Conrad Levinson’s Guerilla Marketing is a classic.
SmallBizLady: Can you share some simple marketing strategies for “no complaints” pricing?
Ellen Rohr: Get testimonials from your existing customers. Tell them upfront, “You have made a great decision with your purchase. I’m going to do such a great job on this project that you are going to be happy to say nice things about me. That’s my intention. So, I will stay in communication during and after the project to make sure you are happy. If you are ever not happy, let me know. I can make it right! When we are wrapping up, I’ll ask you for your thoughts. Fair enough?” Then, do a GREAT job. When you ask for the testimonial, have them talk…you write it down. Take their picture and put together a flyer, postcard, door hanger…all of the above. Ask them to post a line or two on Angie’s List and Yelp and Facebook. Your customers bragging on you can be leveraged in all kinds of marketing.
If you found this interview helpful, join us on Wednesdays 8-9 pm ET; follow @SmallBizChat on Twitter. Here’s how to participate in #SmallBizChat: http://bit.ly/S797e
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.
I was just talking to someone who was a consultant and she said that one important thing to remember is to add into your costs the amount of time it takes to find new work, you have to build in that time into your hourly rate…and it might be 33% of your time!