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        A Home-Based Business Online

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        Pricing Your Products and Services to Get and Stay In Business

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        Learn the best prices to charge your clients and customers in order to cover your expenses and make a decent profit while offering something affordable.




        Pricing Yourself to Get, and Stay, In Business

        © 2013 Elena Fawkner

        It goes without saying that the bottom line of any successful
        business is profit.  Don抰 make a profit and you won抰 be in
        business for very long.  Making a profit is pretty simple really.
        You just have to make more than you spend.  The trick is to
        know how much you have to make to exceed what you spend.
        And you spend more than money when running a business.
        You spend something infinitely more valuable.  Time.  And,
        as we all know, time is money.

        To maximize profits, accurate pricing is absolutely critical.
        Your prices must be high enough to cover costs and enable
        you to earn a reasonable return but low enough to remain
        attractive to prospective clients.

        New entrepreneurs often have difficulty accurately pricing
        the value of their time and expertise.  Some take the approach
        that they can work cheaply because they are fast and they抮e
        prepared to take any work, now matter how low-paying, to fill
        in the time between more lucrative assignments.  For this
        group, the mindset appears to be that any work is better
        than no work.   Although this may seem reasonable when
        you're first starting out and you just want to make your
        mark as early as possible, the downside is that this short-
        sighted approach can create in customers a 揷heap?
        mindset that is difficult to shift once the business becomes
        established.

        Another group of entrepreneurs, though, takes the approach
        from the outset that they are worth top dollar and demand
        fair pricing for the value they provide and won抰 accept anything
        less.  This group appears to be more successful than the
        former in the longer run.  Sure, they may find it slow to start
        with.  After all, they are new in town, they can't rely on
        repeat business and they can't ride the wave of their own
        impressive reputations.  But by setting the bar high to start
        with, when their businesses DO become established, they've
        set the tone and their businesses usually have a firmer
        foundation for it.

        This article looks at the fundamentals of pricing for the new
        home-based business entrepreneur.
         

        BASIC PRINCIPLES OF PRICING

        Here are some basic principles to keep in mind when
        considering your pricing strategies:

        =>  Prices must at least cover costs.

        If you don't at least cover costs, and this includes an
        amount for your time, you will incur a loss.  If your business
        is incurring a loss it's a hobby.
         

        => The best way to lower price is to lower costs

        As price equals costs plus profit margin, it's obviously better
        to reduce the cost element than the profit element if, for any
        reason, you find that you must reduce your prices.
         

        => Prices must reflect the environment in which they operate

        Any price, whether yours or your competitors', necessarily
        reflects the dynamics of cost, demand, market changes,
        competition, product utility, product longevity, maintenance
        and end use.
         

        => Prices must be within the range of what customers are
        prepared to pay

        It's all very well having the best bread slicer in the western
        world but if your price is more than customers are prepared
        to pay for it, so what?  On the other hand, there is absolutely
        no reason to charge less than customers are prepared to pay
        either.
         

        => Prices should be set at levels that will shift products
        and services and not to beat competitors alone

        It's easy when you start delving into all of the sophisticated
        analysis and research around about optimum pricing levels
        to forget that, at the end of the day, you set your prices as
        high as you can while still shifting your products and
        services.  So don't think that keeping pace with competitors
        is enough.  It isn't.  You may have competitive advantages
        that mean you can price higher than your competitor and
        still charge more.
         

        => The price you set should represent a fair return for your
        time, talent, risk and investment

        Don't be coy about demanding a reward for what you
        bring to the table.  Your expertise and talent has objective
        worth.  Don't just give it away.  Charge for it.
         

        PRICE = COST + PROFIT MARGIN

        The basic price you will strike is simply your costs plus a
        profit margin.  It follows that before you can set your prices
        you must know exactly what your costs are.  Costs fall
        into three main areas:

        => Direct Costs

        Direct costs are those things directly related to the creation
        of your product such as raw materials, parts and supplies.

        => Overheads

        Overheads are business costs not directly related to
        production and include things such as taxes, rent, office
        supplies and equipment, business related travel, insurance,
        permits, repair of equipment, utilities (electricity and
        telephone) and professional advice (accountant, lawyer).

        => Labor

        Labor costs include all wages paid to employees *including
        yourself*.  It's amazing how many home-business owners
        forget to include their time as a cost of business!

        Calculate your labor costs by multiplying the number of
        hours worked by an hourly wage.  You should also include
        fringe benefits (typically 15% plus).

        Once you have ascertained your total costs, add a profit
        margin.  A 15-20% profit margin is standard for most
        home-based businesses.  Although you have included
        your own wages in your labor costs, if you don抰 add a
        profit margin there will be no money for growth or expansion
        of the business.
         

        RELATIONSHIP BETWEEN PRICES AND PROFITS

        The easiest way to increase your profit is to raise your prices.
        But you can抰 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扵.  The
        Sherman Act in the US (and similar legislation in many
        other jurisdictions) prohibits businesses of any size from
        entering 揷ontracts, combinations or conspiracies?in restraint
        of trade.  In other words, it抯 illegal to make deals with
        competitors about what price you抣l charge or what services
        you抣l 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抰 offer tangible products at all.
        Sometimes, YOU are the product.  So, how do you price
        yourself if you抮e, 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抯 say your expenses and salary needs mean that your
        business needs to be generating $100,000 a year.  Let抯
        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抯 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
        搒ales?, 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.

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        ** Reprinting of this article is welcome! **
        This article may be freely reproduced provided that: (1) you
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        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Monday, 25-Jan-2021 21:24:40 CST

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