Pricing Strategies for Small Business. Andrew Gregson

of their shop floors. A lot of my book is focused on helping small business owners to understand their costs and learn how to measure them.

      As I have done my research for this book, I have dramatically expanded the value-added portion of pricing theory. In the past decade, pricing theory has reappeared in academic journals. The thrust of the research is no longer concerned with costs but with adding perceived value. The assumption is that the company knows its costs and as long as it covers its costs, it can proceed to add value by raising prices. I have used this information greedily.

      If you read this book completely, you will discover that price is not purely a numbers game. In fact, it is difficult to get away from the notion that price reflects how a business delivers value to its customers. High prices ought to reflect high value. Low prices should reflect commodities with little or nothing injected to add value. Therefore a large portion of this book encourages you, the reader, to review your business as a potential customer would; what value do you offer, how much is that value worth compared to your competition’s offers, and is this transaction a fair trade?

      Journeying down the path of price discovery entails looking into many dark and perhaps underperforming corners of the business. Therefore, this book touches on but does not exhaustively examine sales training, merchandising, estimating, motivation and marketing. In each area I have tried to keep the focus of the impact of pricing strategy on areas such as staff motivation, for example, and in reverse the impact of staff motivation on pricing structure.

      As a business owner you only have to work half a day, and, better yet, you get to choose which twelve hours. I remember being a small business owner and how true this joke was for me. With that in mind, I have tried to recognize that the average business owner will get maybe five minutes of uninterrupted time to dip into this book and grab a useful idea, or perhaps the inspiration to read a whole chapter at night after business shuts down and everyone has gone to bed.

1. Baker, Ronald J. Pricing on Purpose. Creating and Capturing Value. John Wiley and Sons Inc. Hoboken, New Jersey. 2006

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      How to Know If Your Prices Are Alright

      I argue throughout this book that a business owner must see his or her business as a struggle of perception. Customers strive to reduce everything to the most easily comparable state — apples to apples — and that means dollars per unit. A business must strive, on the other hand, to stop this from happening by presenting itself as pomegranates. If successful, then the customer cannot reasonably make a comparison on price only. Create a perception in the customer’s mind that the business, product or service is different, and long-term business success can be yours. Create differences that actually have value in the mind of the customer. Throughout this book there are examples of perceived value and how it can be converted into better prices and better profits.

      Before we can pursue that topic, however, we need to know if pricing is an issue in your business. In this chapter, I have highlighted a number of ways to see if your prices are too low. In the appendices, I have added sections on the math calculations to confirm this judgment and to help you measure the impact that pricing your product or service too low can have on your business.

      Is Price Just a Number?

      Price is the amount of money charged for a product or service for the benefit of receiving a product or service. The word “benefit” is emphasized because small business owners frequently lose sight of the relationship between benefits and the simple transaction of buying and selling.

      An example is that of eating in restaurants. Most people eat in restaurants to celebrate an occasion, for “date night,” or merely to take a break. The experience of eating out is the benefit, and the price tag cannot fairly be compared to the money spent if the same meal was cooked at home instead.

      What Makes Pricing Successful?

      Pricing is successful if:

      • The company has a decent profit

      • The owner is paid a reasonable wage

      • The company and the owner pay their taxes

      • The company has no difficulty finding the cash to pay the bills

      • The company attracts the best quality customers who are willing to pay for the value added by the company

      • The company generates a reasonable return on investment

      • Bids on jobs are planned to leave no money on the table

      What is a decent profit?

      According to Statistics Canada, the average small company in Canada generates a profit before taxes of 5 to 10 percent of sales. This is not the only indicator of the health of a company but it is a good first step. With healthy profits, cash will be relatively easy to manage; Accounts Payable will be smaller than Accounts Receivable, the bills can be paid without having to hound customers who are just a few days late to cut you a check. If you miss a few weeks looking at the cash flow, it just doesn’t matter too much.

      I don’t like averages; so what should the numbers be for my company?

      Would you like to know what the median numbers are for your type of company? Wouldn’t it be great to know if your percentage of profit or sales costs or even rent is “normal?” There are some ways to get that information. Quite often there are industry organizations that conduct “cost of doing business” surveys annually. By joining a trade association, you could get a survey and compare your own financial statements. Sometimes the previous year’s survey is available at a small cost to give you a taste of the benefits of joining a trade association.

      Paying the owner

      Most importantly, a business exists to create profits after the owner is paid. Small business owners often lose sight of this objective in the sound and fury of everyday business, but a paycheck was clearly important when they began or bought the business. Getting the price right is the most important element in reaching the distant goal of financial security — either through profit generation or in getting a good price when selling the company.

      What is a reasonable wage for the owner?

      The simple test is an honest answer to the question: “Could I be earning more working for someone else?” If that answer is no, then the business pays you what you are worth in the open market. If the answer is yes, then your business needs work.

      Or, suppose that you were planning retirement or became disabled. You could hire a manager in order to step back from the business and pay that person your wages. Would your pay be enough to attract and keep that person? If the answer is yes, then you are paying yourself a market value wage.

      If you calculate the total hours you spend working and your wages are less than the wages of person who sweeps the floor, then you are not paying yourself enough.

      Consider this scenario: You have a potential buyer across the desk from you. Of course, the price for the company is the topic. He or she wants to know how much he or she will earn and how much will be left over in the company. Is there a bottom line after his or her reasonable wage?

      The company and the owner pay their taxes

      Why is this important apart from not having CRA or the IRS chasing you? Recently I spoke with a business owner who wished to buy a house. His credit score was excellent and he had cash in the bank to manage the down payment. But because he had deliberately understated his personal and business income to reduce his taxes, his provable income was too low for the bank to consider loaning him the mortgage money.

      In