Check out the 4 Factors you need to set a clear pricing strategy: a crucial step in building a financially successful business.

Recently I had a conversation with a business owner who wanted to be able to pay herself more and was thinking about exactly what kind of support would help her hit her goals.  She scheduled time to talk with me because she wanted to know if our CFO Service was the answer. 

In our short 30-minute call we got down to strategy pretty quickly and we were able to zero in on the top issue limiting her owners’ pay. Here’s the shortlist we talked through

• Cash management: her cash flow is fine, and she is running a lean, budget-conscious business.

• Sales process: she has a good number of clients and inquiries and is producing high-quality content consistently to grow her audience.

• Price: When she compared her capacity (ie the volume of clients she could comfortably work with) to her revenue needs she was pretty close to top capacity. She wouldn’t hit substantially higher revenue by just selling at the same price to more people. 

Now yes, she can and is working on expanding her ability to serve more clients by changing her offering. 

But the real problem in her business is that her price point is too low to provide her with the profit needed to hit her personal income goals.

Pricing strategy is one of the most crucial decisions you'll make in your business. And while you can experiment to test the market, it’s best to have a pricing strategy to work from.

Thankfully, financial strategy is exactly what I do!

So, how do you set pricing for your product or service? 

Pricing Strategy - How it works and why it matters.

First, let’s define pricing strategy. -- I know, I know. More sexy money talk.

When you set your prices, you are setting the amount of money that you will be bringing in as revenue or income from the specific product you are selling or the service you are offering. And when you do that, you are basically determining both your financial constraints and financial success. 

To run a profitable business, you have to have a certain number of sales at a certain price to cover your costs and still have a salary to put in your pocket at the end of the day.

4 Factors for your pricing strategy.

I like to use product-based businesses (especially food) for pricing examples because everyone knows something about food products and pricing from the consumer side. However, I will bring in some tips for service-based businesses at the end, and honestly, the same rules apply to both! 

Pricing Factor #1: Costs

To determine a price for a product in your business, first you have to know how much it costs you to make and deliver it. Especially in a product-based business, you have to consider ALL of the costs. Literally, I mean ALL. THE. COSTS.

You have to factor in:

✔️ The costs of production -- i.e. the ingredients you bought, the product packaging, the time, people and space you need for production, etc.

✔️ How the product is being sold and how it’s being delivered. -- This could be shipping, distributor’s fees, or it could be something else. For instance, if you’re a farmer taking your products to a farmers market, you have to consider the gas, the tolls, the driver’s pay, the pay of the person working with you at the market.  

 Pricing Factor #2: Market Price

You have to know what your competitors are charging to make sure you aren’t completely out of whack with what people are willing to pay. 

Do your research by going into the grocery store or farmers market and actually looking at the prices of similar products. 

Remember, you want to be competitive without underselling yourself or overpricing.

Pricing Factor #3: Volume of Sales

You have to consider how much you need to produce to gain a real profit. 

For instance, if you sell your product for $3.00, but it costs you $2.50 to produce it, you’re only making $0.50 per product sold. (Your price per unit minus the costs to produce gives you the gross profit, or  profit per unit.)  This is a crucial number to know and track, because the gross profit will determine how many units (or cases, or services) you have to sell to cover all your other costs, pay yourself and make a profit. 

The standard or acceptable gross margin can vary wildly in different industries and with different sales channels, but we can all agree that if you are only getting  50 cents of profit on each thing you sell, you’re going to have to sell a whole lot of those products to earn enough money.

Now, if you’re selling at Walmart, $0.50 per product sold may be enough! Because at a big store like this, you may be selling hundreds of thousands of units. However, if you’re an artisanal brand or have a small production scale, you’re going to need a much higher profit per item.

And this factor is definitely important for both a product and service-based business. Your capacity matters! 

Here’s a quick check for capacity: Take your target revenue for the month, divide that by the price and you’ll find out how many of each thing you have to sell to hit your target revenue. Stop here and think about both operating and sales capacity. Can you produce that much?  Can you sell that much?  

Pricing Factor #4: How You Position Your Brand in the Marketplace

Your brand identity is also a vital part of your pricing. 

What do I mean by that?

Well, if you have a brand that’s all about making healthy food accessible to lots of people, then you’re going to want your pricing to reflect that. Your prices will need to be affordable to people who shop for bargains and are highly price conscious, and the look and feel of your brand should appeal to them.

Alternatively, if your brand creates a high-end specialty food product with organic certification and local sourcing, you could choose to price it more highly in relation to market prices and work on branding that makes it appealing to people who are willing to pay more for these options. There are lots of brands who have done this successfully! 

Bottom line: Your brand identity has to match your pricing strategy.

A few more thoughts for service-based businesses...

I promised I’d get back to you! 

For service-based businesses like coaches or consultants, you need to consider these 4 factors as well, but you do have a little more room for experimentation when it comes to your pricing. The biggest factor for successful pricing of services is how much your best customers are willing or able to pay; and how much competition there is in your market.

While product-based businesses will definitely hit a ceiling on how quickly they can ramp up or change their pricing, serviced-based entrepreneurs have more wiggle room.

However, service-based businesses may be more limited in their ability to scale quickly depending on the services you offer and the team you have behind you. And you have to set your prices accordingly. 

How can you get more help with a pricing strategy for your business?

I’m super glad you asked!

Join CFO Advisor. Our CFO Advisor program gives you expert guidance as you put our financial framework in place quickly, starting with Profit First implementation.  You’ll continually hone your financial knowledge and skills and maintain accurate and up-to-date information in an efficient and seamless process.

CFO Advisor is a 6-month program that provides CFO support through a mix of 1:1 and group sessions plus online skills building. Learn how to manage your finances, boost profits, and upgrade your financial decisions based on meaningful information.

If you want to know if it’s the right choice for your business... Let’s talk!