Why is setting prices for products and services so difficult for new entrepreneurs?
The right price covers all your costs, allows you to make a profit, and is acceptable to the customers you are targeting. But when you’re starting out, you may not have a good handle on all the costs you’ll incur. Among the many costs that are easy to forget (until you have to pay them) are payroll taxes, self-employment taxes, fees for accepting credit cards, health insurance and other benefits, and a variety of overhead expenses.
Why is pricing particularly difficult for service-based businesses?
Unless you have previous experience estimating jobs in the same industry, you may have difficulty making accurate estimates of the time and/or materials needed to complete jobs. You also may not account for non-billable hours—the time you spend marketing and promoting the business. And for some types of consulting businesses, prices or hourly rates may not be advertised or published, so it can be very difficult to know what anyone else is charging. Rates may also vary by the level of expertise of the person doing the work, and the work being done.
What are some things you can do to help improve your visibility and attractiveness to new customers?
Social networking and online presence play a big role here. Gather testimonials from satisfied customers that you can use both in print and online. Also, ask customers to “like” you on Facebook, endorse you on LinkedIn, and post positive reviews on review sites such as Yelp. I’ve seen studies that show that, depending on the purchase, between 55% and 90% of consumers will research a product and/or company online, so legitimate reviews are important.
Some entrepreneurs think discounts or charging nothing at all early on will help jump-start their business. When is this a good strategy?
Say a large-volume customer has a fault—late paying invoices, picky about your work, etc. Should you simply put up with the problem, try to change his/her behavior, or “fire” them and work on landing other, hopefully better customers?
- You need experience. Working for one or two clients at a steep discount or for free may makes sense if you’re starting a business where clients are going to want to see examples of work you’ve done for others or read case studies of how you’ve solved problems for your clients.
- You are developing groundbreaking equipment or software. In such cases, giving away the product or offering it at greatly reduced prices in return for client feedback, to work out bugs, and for subsequent referrals, can be invaluable.
- Free samples/trial periods. To make this work, though you need to have a great product, a method to track and convert freebie customers, and the cash flow to support it all.
It will always depend on the situation, but there are ways to address them. But “firing” customers is pretty extreme. You don’t want to burn a bridge. It may be better to ease out and offer to help the customer find someone who is a better fit. You don’t want to add to their problem; you want to be part of the solution. Often, when I’ve taken this approach, clients have apologized and owned up to their issues, then asked what can be done to make things right. This shifts the relationship and, often, preserves it.
When are discounts NOT a good start-up strategy?
Startups often go wrong by trying to break into a market and gain market share by underpricing their competitors. However, discounting can lower the perceived value of the product or service, or make the customer think you lack the experience/resources to do the job. If you underestimate costs, or overestimate the volume that will be sold, the outcome will be reduced profits or a loss.
With so much business communication done online today, has the importance of telephone and face-to-face interaction decreased?
Sixty percent of communication is non-verbal, 20 percent is tone of voice; that means only 20 percent is actual content. So if you’re doing email only, you’re losing 80 percent of your communication. Now for job-related things, status updates, and so forth, that’s usually OK. But these days, a phone call is a good idea once a person becomes a client. Just make sure it’s relevant; think about how busy you are, and what you want don’t want to hear in a voice message.
What are some good, low-cost tactics for getting first-time customers?
Are there limits to “free” promotional and networking tactics?
- Spread the word. Contact your network of family, present and past business associates, and friends. Join a couple of social networks, too, but don't spam them! Let them know what you're doing, and either ask for their business or ask for the names of people they know who could use what you sell.
- Talk to business owners in related fields. See if they can refer leads to you, or will promote your business to their contacts. If need be, offer them a commission on sales that come from their referrals.
- Get on the phone and cold-call prospects. Don't worry about rejection. The key is to keep making calls. If someone can't help you, ask who could, or who buys this type of service. Call that person, or ask for that department at the next company you call.
- Be findable on the web. Be sure you have a web presence that adequately describes what you do, and how it helps your customers. Promote the website through social media.
- What challenges are potential customers dealing with? Look for problems that you could solve for new prospects, then offer your services. Explain how what you're proposing will save the customer time and/or money.
- Use existing business groups in your area. Visit them to see which might attract people who are your target customers.
- Ask for help from experts. Talk to community leaders, and your local SCORE mentors, to see if they can point you towards potential customers, suggest places to advertise, or point you to the business groups you should join to find customers.
Don’t plan on using them to build the business. Sooner or later, you’ll have to supplement networking—and for retailers, walk-in traffic—with advertising to get enough sales to be profitable. Because advertising can be expensive, test on a small scale and track results so you can determine which ad efforts work best and should be expanded.
What are the keys to developing a competitive pricing strategy?
- Account for all your costs.
- Know what price the market will bear.
- Determine how much profit you want to make.
- Understand the relationship between selling price, profits, and volume of sales needed to achieve the desired profit.
The SBA guide Pricing Your Products does an excellent job of discussing basic price setting criteria, and includes some worksheets to help make sure you account for all your costs. Check with your local SCORE office to find out if they have materials on pricing as well.
How often should you review/update pricing?
In most cases, review pricing two to four times a year, and at any other time when you see a change in your own costs. You want to spot problems (e.g., cost increases) early on and make appropriate adjustments to continue making a profit. You also need to stay on top of market trends; if prices and demand are rising or falling, you can determine how to stay competitive.
What are some ways to find out what competitors are charging to develop your own pricing strategy?
If competitors don’t list prices, or if you suspect the list price is rarely paid, ask current and prospective customers what they pay for that type of product or service. Also, search the web for terms like “what do web developers charge,” “how to price software,” “how much should I charge for virtual assistant services,” or whatever term applies to your line of work. That type of search will give you results that talk about pricing strategies used in the industry. Sometimes it will turn up a study someone has prepared showing a range of rates for a particular type of service.
What are some fundamentals for effectively managing receivables?
- Avoid receivables whenever possible. Try to get customers to pay up front with cash, check, or a credit card. If you sell a service and customers don’t traditionally pay until the job is completed, get partial payments. A common arrangement is 1/3 to start a project, 1/3 halfway through, and the final 1/3 on completion. Be sure the client knows you won't move onto the next phase until a payment is made.
- Get invoices out promptly. Don’t wait for the end of the month. The sooner your invoices get to your customer, the sooner they are likely to be paid.
- Run a credit check on businesses or consumers when the amount in question is significant. What that amount is, will vary by what you sell and to whom. If the credit history indicates recent problems, refuse to sell on credit.
- Set a policy on how long you'll wait for payment, and then follow up as soon as the payment is late. Don’t sell more goods or services to a company that is late paying, unless you’ve determined there is a good reason for the delay (e.g., your invoice didn't have a purchase order on it and went to the wrong department).
What are some specific collections considerations for online businesses?
- For online credit card transactions, verify addresses and use any other means of identifying possibly fraudulent sales (i.e., stolen credit cards being used).
- Watch for large and/or rush orders in addition to address verification failure orders being shipped to mail-receiving services, and foreign orders when your customers are mainly domestic.
- Use all the fraud tools your merchant account service offers.
- Use a method of shipping that lets you track deliveries, and alerts you if the shipping information you enter doesn’t match postal records.
- Get purchase orders from businesses who order and must be invoiced. If they can't send you a purchase order or written document on letterhead authorizing the sale, don’t extend credit to them.
A customer hasn’t paid his/her invoice. What are the next steps?
- Before you send out that first late notice, contact the customer. Ask if they received the first invoice, and whether anything was wrong with the product or service. Then ask when you can expect to be paid.
- If you’re dealing with a business, ask your contact who is responsible for paying the bill and follow up with that person. As long as the calls are polite, with a focus on customer service and communication, there isn't likely to be objection from the customer.
- If payment hasn't been received, by the next billing period, send a late notice, but also call the business or consumer again, and mention you haven’t gotten the check. Never threaten or harass consumers; laws such as The Fair Debt Collection Practices Act prohibit such practices.
- If you suspect a consumer or business is having a cash flow problem, suggest they make partial payments to pay off the debt.
And what should you do if none of these tactics works?
Depending on the amount involved, the circumstances leading to the late payment, and the customer’s ability to pay, you may want to take them to small claims court or possibly hire an attorney. In most cases, the cost and time involved in suing non-payers in regular court will be prohibitive.
What can a small business do to safeguard itself against check or credit card fraud?
For in-person credit card transactions, be sure the customer’s signature matches the signature on the back of a credit card. If anything seems suspicious, call your merchant account provider and ask to speak with a Code 10 operator for authorization. To help prevent check fraud, ask for identification and use a check verification service. You can find them on the web.
Should you review receivables and collection policies periodically?
Yes. You want to look at whether your receivables are growing and if so, why, what effect that’s having on your cash flow, and what steps you can take to get paid sooner. You also want to see if any particular customers are increasingly late. If so, you may want to step up collections efforts, as long as you stay within collection laws.
What would you say to a new or established small business owner who asked whether it's worth consulting with SCORE?
There's no better way to find out how to really run a business than to consult with someone who has done so and can mentor you. SCORE mentors know from firsthand experience what's really involved with making a business successful, and they want to help other small businesses succeed. It’s the best investment of time you’ll ever make in your business.
Subscribe now to receive SCORE ExpertAnswers every month by email!