Set your floor with your cost
How do you set your prices?
For those just tuning in, here's my Simple Pricing Strategy framework that I use for my clients:
Set your floor with your costs
Set your ceiling with your customer’s ROI
Set your expectations with the market
Set your bill frequency with your conversion and churn rate
Today, let's dig into #1 - Set your floor with your costs.
Now, this one can be a little confusing, firstly because this:
You should NEVER base your prices on your costs.
People make this mistake all the time - especially in traditional industries like retail.
You'll often hear benchmark standards - "50% markup", "hourly rate times X", "cost-plus fixed fee", etc.
Despite how common this method is, it's almost never optimal.
Because price isn't about costs; it's about customer value.
(Which we'll get to in step #2).
BUT, cost is important.
Knowing the full costs of providing your service or product is important.
Because without knowing it,
You'll have no idea if that product or service is worth doing.
This is why I also like to refer to your Cost as your Floor.
It's the price at which this thing isn't worth doing.
It's the price you can't go below.
It's the "stupid idea" threshold.
It isn't your price; It's your "Out of the question" price.
So, how do you calculate this Floor?
The truth is, it's done slightly differently for each business type.
But here are some pretty universal hints:
You have fixed costs and direct costs.
Fixed costs = Costs incurred to run your business.
Direct costs = Cost incurred when you sell another unit of whatever you sell.
The cost of your product/service must include both the direct costs, PLUS some share of the fixed costs.
How do you determine how those fixed costs get shared? However you like! Just make sure it makes sense.
Most accounting softwares won't be able to calculate this for you out of the box. You'll likely need to work in Excel.
If you think you don't have costs, you're probably mistaken: Use your opportunity costs. Aka: the amount you could be making if you did something else (like went and got a W2 job 🙃)
So now the question is, What is your Floor?
...And now that you know it, are your current prices high enough to cover it?
Try it out and tell me how it goes!
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