Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
IBGR.Network - PROFIT Radio. Everything a business owner needs to start, grow or exit a business. GROW WITH US.
Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy!
Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up! You can submit your questions directly to Hello@kashthebookkeeper.com! You may hear your question aired live across the globe!
Last week we started our discussion about creating products from our service based industries. This week we continue that topic and explore how to price these products! On season 3 episode and 8 and 9 cover the traditional accounting methods of pricing your services, check them out here: https://pod.co/money-matters-with-kash-the-bookkeeper/1-money-matters-revenue-all-that-glitters-is-gold-right-kasfia-rashid
At the end of the day we want to be paid for efforts made. Setting the right prices for products is a balancing act. A low price isn’t always ideal, as the product might see a healthy stream of sales without turning any profit. Similarly, when a product has a high price, a retailer may see fewer sales and “price out” more budget-conscious customers, losing market positioning.
Ultimately, every small business will have to do their own homework. Retailers have to consider factors like production and business costs, consumer trends, revenue goals, and competitor pricing. Even then, setting a price for a new product, or even an existing product line, isn’t just pure math. In fact, that may be the most straightforward step of the process.
Show Objectives - The Why
Product pricing is an essential element in determining the success of your product or service, yet eCommerce entrepreneurs and businesses often only consider pricing as an afterthought. They settle and use the first price that comes to mind, copy competitors, or (even worse) guess.
Humans are irrational. Product pricing strategy is just as much an art form as it is a science. There are lots of product-pricing strategies out there based on the study of human psychology. Ending your price with a 9 or a 5, for example, is called “Charm Pricing.” Millions of businesses have used charm pricing to price their products, and it's proven to increase sales. Or there’s “The Rule of 100,” a fantastic psychological hack to maximize the perceived magnitude of your discount, no matter the discount size. With The Rule of 100, businesses use percentage amount discounts for items under $100 and dollar amount discounts for items over $100.[*]
Instead of asking yourself what an item is worth, you might tend to ask what will consumers pay? If that’s the case, not only are you cheating yourself with an unfair price, but also other sellers. When too many sellers in a niche under-price their products consumers grow accustomed to the low price and feel cheated when asked to pay a fair rate.
It’s time to change that.
The first step in pricing your products or services is to validate them in your own mind and then in the minds of your customers. Follow these quick steps to validate your product idea.
What You Need to Know - The What
Thousands of entrepreneurs and decades of learning have paved the way for new businesses to craft a strategy that utilizes the most innovative pricing options available.
Knowing which pricing models work best in your industry can simplify how you price a product, and give you confidence knowing that you’re not simply guessing.
COST-BASED PRICING- Traditional accounting method!
One of the most simple ways to price your product is called cost-plus pricing.Cost-based pricing involves calculating the total costs it takes to make your product, then adding a percentage markup to determine the final price. This method is simple, fast, and lets you quickly add a profit margin to any product you intend to sell.
Also referred to as a competition-based pricing strategy, market-oriented pricing compares similar products (competition) in the market. The seller sets the price higher or lower than their competitors depending on how well their own product matches up.
Dynamic pricing, also referred to as demand pricing or time-based pricing, is a strategy in which businesses set flexible prices for a product or service based on current market demands. In other words, dynamic pricing is the act of changing a price multiple times throughout the day, week, or month to better match consumer purchasing habits. Yes! That’s right, you can CHANGE your pricing strategy depending on how your customers are responding!
It doesn’t matter which of the above strategies you use in your business- go wild and combine elements of them all- your accounting books and records are going to be the basis of the resulting price. In order to use any of the strategies, you need to have the numbers to implement them. Can’t add a profit margin to costs, if we don’t keep track of the costs used to produce ( and time ! ) a product. Reviewing your financial records on a consistent basis will allow you to to see patterns and trends for dynamic pricing strategies and market shifts. If your sales suddenly decline or boom- there’s a reason for it and it rarely has to do with the actual price of a product or service.
What You Need to Do - The How
The above strategies work with any type of product or service but in the age of quarantine, the amount and access to digital products have skyrocketed- many of them being used as promotional or freebies! ( Mine are at the bottom of this page) So how are you supposed to price a digital download profitably when so many people are selling them for single-digit prices -- or giving them away for free?
There are several steps to picking the best price for your product, from calculating your expenses to determining the value that your customers see in your product.
We have already discussed cost - based pricing earlier so I want to focus on Value based pricing here. Value-based pricing is when a company determines their product’s price based on what their audience members are willing to pay for it and how they perceive the value of your product. This is one of the toughest lessons my clients have to learn!
One of the benefits of value-based pricing is that even if your product costs relatively little to produce, you can achieve a higher margin than you would using the cost-based pricing model.There are successful digital downloads available at all price points, so there’s no concrete rule about how to price a digital download.
As a general rule, if you’re just starting your business out and haven’t built up a brand reputation yet, price on the lower-middle end of what your competitors are charging for similar products. Consider the added benefits of your product vs the competition and focus on that when you are marketing. Offering payment plans and subscriptions are also an easy way to keep the price of a product low. However, while keeping a low price will attract more leads, you don’t want to set such a low price that you have to double-time to hit your profit goals.
I have seen significantly more creators make $1,000 by selling 10 of a $100 product than 100 of a $10 product, so there’s value in higher fees, even for first-time sellers.
The key components to track here aren’t just sales numbers and revenue goals, but customer data and demographics! Keeping a close eye on who is buying what and when they are buying it will give you greater insight into how to triple or quadruple your profits!
Previous: How do I turn my services into products?
Next: How do I account for start up costs?
Written by Kash the bookkeeper
Check out the last QuickBooks Online Tutorial you will never need here!
You can connect with Kash on any of her seriously social platforms under the handle @Kashthebookkeeper
Connect on LinkedIn
Follow on Instagram
Like on Facebook
Leave a Reply.
new choice for BUSINESS SEARCH