by Elena Fawkner

Relationship between Prices and Profit

The easiest way to increase your profit is to raise your prices. But you can't just raise prices indiscriminately. Look for ways to manipulate niche pricing instead. This means looking for specific areas of your business where you have some latitude to increase prices.

The way to do this is to identify the areas where the perceived value of what you are offering is higher than the price you are currently charging. Start by carrying out a competitive analysis of your business. Find out how your product compares with your competitors' on the basis not only of price but costs as well.

If you are going to source this information by approaching competitors directly, a word of caution ... DON'T. The Sherman Act in the US (and similar legislation in many other jurisdictions) prohibits businesses of any size from entering "contracts, combinations or conspiracies" in restraint of trade. In other words, it's illegal to make deals with competitors about what price you'll charge or what services you'll offer. Merely discussing prices with competitors can be construed as an attempt to conspire on prices. This is one area where you just don't want to give even the *whiff* of an impression of doing anything of the sort.

So, be circumspect in your research. Never discuss prices with competitors and avoid frequent communications with them at all if possible. Instead, to keep tabs on what your competition is up to, read their ads, talk to their suppliers, engage mystery shoppers or send an employee to make observations.

Once you have completed your competitive intelligence, analyze your competitive advantages and disadvantages. If, as a result of your analysis, you learn than you have an advantage over your competition because your business is website design and you know how to do cgi-scripting but your competition has to outsource this function and this means a delay of one to two weeks, then this advantage is something your customers will likely pay more for. Adjust your prices accordingly.

When You're the Product

Some businesses don't offer tangible products at all. Sometimes, YOU are the product. So, how do you price yourself if you're, say, an ecommerce consultant and your business is assisting brick and mortar businesses make the transition to ecommerce?

One perfectly reasonable approach is to start with a calculation of your actual expenses and your salary needs and then divide the total by a reasonable estimate of billable hours. An article entitled "Setting Fees" by David Dukoff gives a good overview of how to go about doing this. (To read the article in its entirety, visit http://www.smartbiz.com

Let's say your expenses and salary needs mean that your business needs to be generating $100,000 a year. Let's also say you prefer to charge clients by the hour rather than by quoting on projects. How much do you need to charge per billable hour to generate $100,000 per year?

Dukoff uses the following approach. To start with, how many billable hours do you have? Let's start with 2,080 work hours in a year. Deduct 100 hours for vacation time (2 weeks), a further 80 hours for popular holidays, 40 hours personal time and sick leave and 20-40% of time for marketing and administration. This leaves you with around 1,000 billable hours in a year. You therefore need to charge $100 per billable hour to achieve your goal of $100,000 income.

Other Pricing Strategies

Other pricing strategies to include in your structure include discounts to encourage prompt payment or quantity purchases, seasonality issues (for example, end of season "sales"), offering senior citizen and student discounts and other promotional incentives.

As you can see, setting the "right" price for your products and services is absolutely crucial to the profitability (read survival) of your business in the longer term. But with careful analysis and a methodical approach, you should be able to arrive at reasonable pricepoints without too much difficulty. Then it's just a matter of monitoring demand in response to price changes to settle on the optimum pricing for your business. But don't rest there. Your prices operate within a constantly changing environment and you need to be ever-vigilant to ensure that your prices remain at their competitive maxima. One final piece of advice: if in doubt, price high rather than low. It is much easier to discount prices than it is to increase them.