I see and analyze hundreds of businesses every year. What I have found is small business owners (generally businesses with less than $3,000,000 in sales) have a consistent weakness that costs them dearly.
A terrible lack of effort and intelligence in determining the correct pricing of their product or services. In my practice I often see the exact same type of businesses that are often only a mile or two from each other and their pricing is wildly inconsistent and illogical.
Here’s a real life example:
I am changing names and details to protect the guilty.
Bill’s Auto Service does $950,000 in sales and net profits to the owner, yep Bill, of about $75,000 (it varies quite a bit from year to year)..
Bill called me. He’s considering selling his business and would like me to give him my opinion of his business value. Bill is getting ready to retire and is in pretty good shape but he needs to sell the biz for a certain amount to retire. I meet with Bill and go through the usual stuff. Bill has a nice clean biz with no real “deal breakers” that I can see. When I get to the part where I ask Bill about his pricing he gives me a common answer….
Me, “Bill, how do your set your pricing?”
Bill, “after all these years I have a feel for what my customers are willing to pay for certain kinds of repairs”.
Me, “do your customers ever complain that your prices are too high?”
Bill, “all the time”
Me, “do they ever complain when your prices are too low?”
Bill, “Are you kidding?”
Me, “How would you know if your prices were too low, let’s say on a timing belt change for a Honda?”
Bill, “I guess I’d be losing money, so I’d know.”
Me, “how many timing belt’s for Honda’s do you do in a year?”
Bill, ” I’d say 1 every other week..about 25 a year.”
Me, “If you were $100 too cheap on that for a whole year would you notice not having that $2,500?”
Bill, “Probably not”
Me, “That’s exactly my point.”
Bill, “How do you think I should set my pricing?”
Me, “Let’s do it right now. What would you charge for replacing a timing belt in a Honda Accord?”
Bill, ” $550″
Me, “let’s back up 15 minutes. Since I’m not a customer of yours and you said you know what your customers will pay…how did you decide on $550?”
Bill, “I get your point, what’s next genius?”
Me, “let’s get out the trusty phone book and start calling repair shops in your area and Honda dealers.”
After about an hour we have 9 prices.. lowest to highest – $425, $475, $520, $550, $575, $590, $600, $675, $800. Remember Joe is $550. The $675 price is the Honda dealer.
Me, “Bill based on this info do you still feel that your price should be $550?”
Bill, “No way, I should be able to get what the Honda dealer gets, I can have the customer in and out in half the time and my warranty on our work is better!”
Me, “What about this strategy? Why don’t you price the job at $650 and every time you quote the job you say to the customer..My price of $650 is less than the Honda dealer, I can have it finished in half the time and my warranty is better”
Bill, “that sounds good but what if they go to the other cheaper guys?”
Me, “Bill, those people are already cheaper than you, what difference does it make? Plus if you are making $100 more on each job you can do fewer jobs and make the same amount. You can afford to lose some jobs to the lower price guys.”
Bill, “I guess you’re going to tell me I should do this for all my work.”
Me, “Either you do it or the smart guy who buys your biz will do it and guess what? He will get a bargain because the business is more profitable than you are letting it be. You will sell the biz based on profits lower than what the biz can generate if managed properly, no offense.”
Bill, “Maybe I need to do some work if I want to get full value for selling the biz.”
Me, “I agree, because I would rather sell your business for more money since I’ll make more money!”
The point of this is as a small biz owner you owe it to yourself and your employees to get your pricing right! It’s important and it’s easy.
I am not kidding, the above is no exaggeration, too many small business owners simply pull out of thin air the prices for their products or services. Are you that owner?