Posts Tagged ‘product vs service’

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First, let’s agree that there is a difference between the right price for a product you are selling and a service you may be offering. Let’s also understand that there are products and services in certain types of business for which you don’t control the prices. Examples include insurance and investment brokerage or owners of franchises. Real estate commissions are set by brokerage firms and individual agents may reduce their own commissions but as a general practice, the rate is set by a third party.

But when you work for yourself, you need to establish the right price. If you are selling a product, you need to make sure that you properly account for your labour, materials, overhead and profit margin. If you are selling your services, then you will have overhead and a desired profit level.

In terms of product, there are many studies that you can find online about pricing strategies. Beer seems to be a favourite product to explore consumer behaviour. For example, when consumers were offered three separate price points, $1.60, $1.80 and $2.50, 80% chose $1.80 and 20% chose $2.50. But when offered only two price points, $1.80 and $2.50, they chose the higher one 80% of the time.

I also found 10 different strategies, each one a topic unto itself. For simplicity, here they are:

1. Penetration Pricing – low price to attract new customers
2. Skimming Pricing – start high but eventually lower with time. Eg electronic games
3. Competition Pricing
4. Product Line Pricing – different prices for different products in the same range; eg cars
5. Bundle Pricing – BOGOF, buy one, get one free
6. Psychological Pricing – positioning price within the market eg $99 instead of $100
7. Premium Pricing – to reflect exclusivity; custom made clothes
8. Optional Pricing – selling extras
9. Cost Based – cost plus markup; used in highly volatile markets such as gas prices
10. Cost Plus – cost & % profit

Michael Masterson spends considerable time in his book, “Ready, Fire, Aim” discussing optimal selling strategies – the particular combination of media, pricing & positioning that will bring you the most qualified customers. He also discusses how pricing affects your sales. The one statement he suggests that is simple – start by selling it at the same price as your competition. Once again, I suggest you pick up a copy of his book and read the first 150 pages.

When it comes to selling your services, if you can control your selling price, then all you need to do is make certain that you are covering all your costs and making enough of a mark up to meet your financial goals. Michael Zipursky offers a simple fees calculator that takes most everything into consideration.

Since it’s an Excel spreadsheet, it’s easy to modify to suit your needs. I can send you a copy if you email me your coordinates.

Last, some service based professions such as interior designers have their own issues making pricing a challenge. They typically get revenue from consulting fees, drawing fees and product resale. But as a profession there are no standards so it’s difficult to set prices. This is also true for notaries and I’m sure there are others that fit into this category. As a consultant, I do not charge for an initial consult but I know others that do. It all depends on perspective, the industry and in some cases what works for the individual. Often, whether you sell a product or your services, it’s a matter of trial and error. I’ll leave you with one last thought – when should you say no? I cannot give you a pat answer, because there are many variables to take into account, including your perspective of your client. So maintain the strength of your convictions but always make flexible your vision.
Happy Pricing!

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Virtually every charity for which I have worked has raised money by holding a variety of charitable events. Many of these events are fabulous – donors, participants and sponsors alike all have a great time with galas, poker tournaments, golf tournaments, concerts, raffles, auctions, bazaars, fashion shows, wine & cheese (Steak & Scotch is better) evenings, Something-a- thon – indeed the list is endless. But how much do they really raise? Does the ROI, if calculated properly, justify the effort that went into creating the event?

I recently visited a potential client who advised me that her organization nets about $200,000 (for 4 events) but the volunteer group is starting to burn out. Clearly, they need to sustain their current fundraising efforts but need to do something else before volunteer burnout sets in completely. I wonder how many other organizations out there are in the same situation.

I have estimated that to plan a major event (to net $150,000) requires at least 445 professional hours and at least 10 – 20 volunteers that put in 100 hours each over a 6 month period. For this exercise, let’s assume 15 volunteers@100 hours. In total we are talking about 1945 professional and volunteer hours to make this event happen. Let’s assume their combined average cost is $50 per hour. So the labour cost for this event is just over $97,000. Assuming all other costs are factored out by sponsorship, ticket sales, etc. breakeven is $97,000. If the net was $150,000, the ROI would be 1.54. Is this acceptable? At the end of the day, what ROI makes the cost worthwhile? And is there an opportunity cost, that is, could more money be raised for the same effort?

I work with charities and non-profits to help them do what they do better. If your organization is looking to increase its ROI, contact me at 514-947- 3406 or email me: allan@allangroup.ca to discuss what we can do for you.

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