Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9pm ET. This is excerpted from my recent interview with Alfred Edmond @AlfredEdmondJr is SVP/Editor-at-large of Black Enterprise. He is a content leader, brand representative and expert resource for all media platforms under the Black Enterprise brand, including the magazine, television shows, web site, social media and live networking events. From 2008 through 2010, Edmond was SVP/Editor-in-chief of BlackEnterprise.com, helping to lead the transition of Black Enterprise from single-magazine publisher to digital-first multimedia company. From 1995 through 2008, Edmond was chief editor of Black Enterprise magazine. He also hosts The Urban Business Roundtable on WVON-AM in Chicago and Money Matters, a syndicated radio feature of American Urban Radio Networks.
SmallBizLady: How can a small business get paid what it is worth?
Alfred Edmond Jr: To get paid what it is worth the first thing a small business must do is understand that profits don’t happen by accident, or just by being a good, nice person or passionate about your business. To turn a consistent profit requires research and planning, so you can establish what your goods and services are worth, and then have the entrepreneurial conviction to price and sell to earn a profit on purpose and without apology.
SmallBizLady: You once wrote a blog called “Why I hate the hook-up” can you explain your idea behind this?
Alfred Edmond Jr: The “hook up” is when entrepreneurs give away their valuable goods and services to family, friends and others in their community free of charge, as a show of community support, cultural solidarity or friendship. This is very common among African American entrepreneurs, who are often pressured or guilted into hooking people up. The problem is, entrepreneurs devalue the quality of their goods and services when they routinely sell them at a loss, or give them away, which is why many of those businesses struggle and fail. The purpose of a business is to sell goods and services for a profit. If you don’t do that, you’re not in business. That’s why I hate the hook up–it weakens and kills businesses.
SmallBizLady: How should a start-up go about setting pricing?
Alfred Edmond Jr: There is a cost per unit of goods or service. There is a maximum price you can charge for that unit and still be competitive in the market place. The difference is your profit. You should know all three of these numbers at all times, and market accordingly. To figure this out, you need to break down the costs per unit to the penny, taking into account raw materials, labor, time and expertise, etc. You also need to know what customers are currently paying to others for the goods or services you provide. Price too much lower, and you won’t make a profit. Too much higher, and you’ll lose out to lower priced competition.
SmallBizLady: How often should pricing strategy be evaluated?
Alfred Edmond Jr: Pricing should be evaluated more frequently for many types of businesses. You should always be aware of what your competitors are charging, and why, especially if it is higher or lower than the prices you are considering. And remember, the competition is not just those who sell what you’re selling. They also include those selling substitutes and alternatives to what you sell.
SmallBizLady: Can you explain value-based pricing?
Alfred Edmond Jr: Value-based pricing is a business strategy. It’s when you price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. Trading your skills for an hourly rate can often have you on the loosing end of the deal.
SmallBizLady: How and when should you give a discount?
Alfred Edmond Jr: Discounts must be strategic and should never be given unless they can deliver a measurable result in at least one of three ways: increase sales volume and net profit, reduce costs or some combination of these. Remember, your profit comes from having income or sales greater than your costs of doing business. Discounts that spur revenue generating behavior include those to reward loyalty (i.e. 10 visits to the dry cleaners entitles customer to 11th visit at a discount), referrals (a 5 percent discount for every new paying customer referred by a customer in a given month), or to spur purchases of higher priced items (discounting cost of fries because they will spur higher sales of sodas, which have higher margins that will offset the discount).
SmallBizLady: What is a reasonable profit margin for a professional service business?
Alfred Edmond Jr: There’s no single profit margin that can be deemed universally redeemable for a service business. It can vary widely by type of business and market area and other variables. The answer to that question can’t just be Googled or look-up; it must be researched and constantly monitored, with margin goals being adjusted by the entrepreneur.
SmallBizLady: Why are so many small business owners afraid to talk about pricing?
Alfred Edmond Jr: Many small business owners are afraid to talk about pricing for the same reason some people don’t like to take tests. They haven’t done their homework, so they can’t price with confidence. The key to pricing is doing enough research to know it, not just guess at it. Entrepreneurs who are experts in their industry, not just their business, know prices and can talk about them with confidence. The others? Those are the ones who drop their prices at the first sign of competition, or as a substitute for actually selling the customer on the value of their wares.
SmallBizLady: Why do so many business owners avoid numbers?
Alfred Edmond Jr: Many small business owners have a hard time with numbers because once you know the numbers, you have to do something about it. Numbers aren’t impressed with your title, your business cards, your passion for your business. Either you’re turning a profit or you’re not. It’s amazing how many entrepreneurs do all they can to avoid that reality check. Great entrepreneurs love numbers, because they know that business is a competition and profit is how you keep score.
SmallBizLady: How can you market yourself in a way to prove you are worth what you want to charge?
Alfred Edmond Jr: The best way to market that you are worth what you want to charge is to get your satisfied customers to do the talking for you. Go out of your way to wow your customers and then get the most influential among them to sing your praises, both via word of mouth and social media. If you are as good as you say you are, they won’t hesitate. And if they do hesitate, you need to find out why, so you can make the changes necessary to inspire them to do so.
SmallBizLady: What are your top 3 tips for raising price without losing customers?
Alfred Edmond Jr:. Tips to raise prices without losing customers:
- A. Don’t let a price hike be a surprise to your best or most loyal customers. Tell them up front that it’s coming, be honest about why, and communicate how it will improve the quality of your products or services for them. Also tell them when it’s coming, to give them time to adjust.
- B. If possible, delay the price increase for your best (highest spending), regular customers.
- C. Show evidence that your increased price is still lower than your competitors, or that you are adding improvements and features others are not offering with their price hikes.
SmallBizLady: What is your opinion of MLM or multilevel marketing businesses as a real way to generate profit margin?
Alfred Edmond Jr: My opinion of the MLM business is the same for any business: focus on the numbers. No matter the compensation system, you will occur measurable costs to participate, and that includes the cost of the product you buy for yourself, even though you’ll get credit for those purchases. (Forget the argument that those purchases aren’t real costs because you would have bought those beauty products from someone anyway. As an entrepreneur, not just a customer, EVERY cost counts.) Also add in the value of your time–because no matter what you’re told, selling takes time and nothing sells itself. Know what your costs are and how much product you have to sell before you recoup what you’ve spent. If you can turn a consistent profit with an MLM business great.
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.
Melinda F. Emerson, known to many as SmallBizLady is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of Quintessence Multimedia, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine named her #1 woman for entrepreneurs to follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs. She also publishes a resource blog http://www.succeedasyourownboss.com Melinda is also bestseller author of Become Your Own Boss in 12 months; A Month-by-Month Guide to a Business That Works.