How to Correctly Price Your Product/Service?

Product/Service Pricing is one of the most critical part of your business plan, a bad pricing strategy can literally bring down your business.

When I just start up my logistic business, I make a mistake in pricing my service too low. I though I could make it if I just cover my variable cost and survive just by breaking even. Little did I know that although I am seeing growth in sales, I didn't see and growth in cashflow and it almost cause my business to fail due to insufficient cashflow.

Many entrepreneur fail to realise the hidden cost that must be factor in when it comes to their pricing strategy. And I am here to share a method that I use personally to price my services in hope that people who are starting a business will not fall into the same trap.

The key to good pricing is to know the following formula:

(Img Src:http://image.slidesharecdn.com/breakevenanalysis-121110062807-phpapp02/95/break-even-analysis-3-638.jpg?cb=1352528928)

The breakeven formula allow you to consider all the cost that must be factor in and the amount of units that need to be sold at a certain price to achieve your sales target. Click here to find out more about breakeven formula.

I am not here to teach economics so I will skip the actual calculation using the formula. However, I want to highlight the important cost that must be factor in during the calculation so you can minimize risk of insufficient cashflow.

Important Cost To Take Note

1) Depreciation

If you plan to own machinery or vehicles, depreciation is major cost you must factor in so you will have enough cash reserve to replace them.

2) Your expected earnings

There is no point if your business survive but you can't feed yourself. You need to keep yourself alive to lead the business to greater heights, so factoring in your expected salary will make sure your pricing can allow your company to grow and allow you to survive.

3) 10% - 20% of cost increase

Factoring in 10% to 20% of cost increase can allow you to have pricing that need no adjustment should there be a sudden change in the economy.

Having all this cost in mind plus all the cost involve in your business, you can apply them in the formula and come out with a comfortable pricing. This method of course is not the end all and be all, you will have to adjust according to your business needs and how the market is doing.

Want to Save Money? Track Your Expenses!

Most people gave up saving money too soon because the feel broke after awhile and end up using their saving to fund their necessities. So they actually sabotage their own effort because they make a major mistake.

That mistake is not tracking their expenses! This is extremely crucial and yet nobody likes to do it because nobody want to face the truth of where their money really went (usually goes to some avoidable lavish spending). However if you truly want to change your financial position, this is the first step to do it.

So how can you start?

Commit yourself to track your expenses for a month. You can start by creating a spreadsheet after you got your salary, key in all the bills and fixed expenses that you need to pay and you will get a nett spending allowance.

Next, start keying in expenses you spent everyday, categorize them so you can see where majority of your money went to. Below is an example:














Of course you can customize it the way that suit your lifestyle, the main take away from this is to identify which of your expenses is taking up the largest chunk of your paycheck. While also make you spend within a limited budget.

What to do with this information?

After a month or two of doing this, you should be more cautious of where you are spending your money and you will also subconsciously not overspend your allowance. With this, you can look at how you can make leeway for extra savings that you can put away.

Example, if you find that eating out is taking up a big portion of your spending and you spend an average of $5 per eat out. You can choose to let go 2 eat out and choose to pack lunch instead, you would have save $10. So for the next month, put $10 as your fixed expenses and put the money in a separated saving account.

If you can find more ways to reduce unnecessary spending, you will start to see your saving as a "Fixed Expense" grow bigger. In no time you will have a nest egg without affecting your lifestyle too much.

3 Bucket Method to Diversify Your Savings.

One of a useful method I used to reduce my risk and grow my wealth.

This method basically have you commit to spending less than you earn, split the difference and invest them in different place to reduce your investment risk.

The security bucket are investment like fixed income bond, insurance policy and your first home. This cover your basic needs so at least 60% of the money you saved up goes into here. 

The growth bucket are investment like stocks and business venture where there are more fluctuation. This ensure your money grow faster, however there are more risk involve. Therefore put about 20%-30% of the money you saved here.

The dream bucket are saving for you to complete your dream. The dream bucket can be a dream home, a dream car or a dream vacation. This bucket is basically there to reinforce you to keep you motivated, if not you will have nothing but money.

The central idea is when you make money in your growth bucket, put 50% of the profit to your security and 50% to fund your dream. If your growth bucket goes bad, your security bucket is your safety net.

However, it is extremely important that you don’t take money from your security bucket to fund your growth when an opportunity arise as any unforeseen circumstances will set you back indefinitely. Or worse if you use money in the other 2 bucket to fund your dreams which create a big hole in your overall wealth.

Video Explanation: https://www.youtube.com/watch?v=JyHvNxpebIM

How much to start?

When I say I am running my own business, people usually asked "How much did you put in?". I will reply $x amount, they will follow up with sharing their business idea and telling me it is impossible for them because they need a lot of money.

I am here to say it is not true that you need money to make money, many time it depends on the nature of your business. My business nature now require higher capital investment, however I have started business with less than $200. The most important thing is to dissect the business you want to do and find out what you need to make it happen.

I will give you 2 example (Service business and a Product business):

1) Car Wash (Service Business)
- You don't need to rent a space for this, you can just do it in car park = $0
- You don't need an office, you can just use your home = $0
- You need some business cards (Design the card yourself) = $30
- You need some cleaning equipment = $120

Total start up cost = $150

2) Opening a box shop (Product Business)
- You need to rent a space = $120 - $200
- You don't need a website just use Facebook page = $0
- You don't need an office, you can just use your home = $0
- You need some business cards (Design the card yourself) = $30
- You need some stocks = $300

Total start up cost approx = $500

Many people when they think of starting a business they relate it with a extravagant amount of money because they think they need fancy offices, great website and hire great people. The truth is most of the great businesses you see started in their garage with little or close to zero starting capital.

Don't let money be the thing that is limiting you to greater success, as you can see it doesn't take much to start and even if you fail, you lose little but gain a tremendous amount of great experiences.

101 reasons to QUIT

This haunt me every minute of my startup journey, a little voice in my head that keep telling me "Maybe it's time to quit" and it will come up with reason why quitting make sense. This escalated recently as I realize my company financial growth and how it affect my personal life.

This is a tough fight as the idea of going back to the corporate world is too attractive. However, looking back at how far I've come, it doesn't feel good to go back to comfort zone. So I am stuck with this dilemma. 

The only thing that is keeping me moving is a strong enough purpose. The purpose got me to where I am today and I hope it will bring me down further. 

We have to trust that things will work out and opportunities will present itself. I hope I make it through this tough period. 

Contractor vs Employee

I have been troubled by this decision for as long as I can remember, mainly because I want to balance Cost and my company reputation. You see, this decision is very important especially for a startup as we have very little margin for error.

Below are my thoughts process when it come to "Contractor or Employee" decision:

Contractors

Pros:
1) They are expert in their field, so require less training
2) Cheaper compare to employee as we don't have to pay them if there are no job for the day
3) Most contractor are self-employed so they are highly motivate to complete the job efficiently
4) Contractor can be held accountable should there is any incident on the job

Cons:
1) Difficult control quality of product or service, as they might just want finish the job and move on
2) They can bail on you as they can choose to give up your job and proceed to other job that paid off better, therefore not good for long term

Employee

Pros:
1) Easier to control quality of product and service as your employee adhered to your company quality standard
2) Employee cannot bail on you as long as you paid them on time
3) Once trained can be retain and work for you long term

Cons:
1) Much more costly as we have to factor in CPF, medical benefits, annual leave and incentives
2) Require training before taking up the appointment
3) Company will be held responsible should the employee have any mishap

After much thinking I decided to go with employee mainly because I value my company service quality more than the cost-saving provided by contractor. What's the point of saving some cost but we end up losing sales in the long run due to poor service quality.

I am not saying all contractor are poor in service, but we are unfortunate enough to dealt with a handful of contractor that did not perform well.

So I guess my next step of expansion is to employ some staff and hopefully I get to learn some human resource management lesson which I can share here.

Customer! You are FIRED!

To a startup, every customer is important. Because we need the revenue to keep our company going and growing. However, recently I have a privilege to do De-Marketing otherwise known as firing our customer.

It is not the most pleasant experience I would say as I am worry about what kind of damage my company might take. But after thinking through it, I believe I have make the right move and here's why.

Most of the business book I have read always teaches one rule, the 80/20 rule. This rule represent 80% of your revenue coming from 20% of your client base. Which means we should focus most of our energy on this 20% to ensure they keep producing the revenue.

One of the incident that happen to us was we were trying to keep this customer happy by adjusting the package that we are offering. We adjusted the price, structure and delivery method but no matter what we do they still have the thinking that we are cutting them short. This goes on for weeks and we have done a few job for them at a loss in hope to keep them. After awhile I realize this is not worth our effort, we are not getting paid what we are worth and we have spend way too much time which can be use better to serve other customers who believed in our mission.

So I went on to "Fire" some of our clients and below are a 2 strategies I used:

1) Increase price/surcharge

This is probably the most effective one of all especially when demand for your service is high. Customer who value your product and services don't mind paying a bit more if you can solve their problem. Most importantly it filter off those customer who is just looking to bargain you down because you are a startup.

2) Reject orders

This is encouraged if you have high supplier bargaining power, otherwise you will just look like an arrogant company if you apply this strategy wrongly. They key to this strategy is prioritize, let the customer off slowly and give legit reason why you cannot fulfill their order. For our case, we do transportation and time is sacred so we prioritize by giving time slot first to our key clients and new customer. Then we reject orders only if we are genuinely fully booked. This strategy require some patience but after being reject a few times, the customer will usually look for alternative.

I think the most important lesson here is not to sell less than you believe in even though you are a startup. If a customer don't believe in the value you are providing, move on. There are a million customer out there and the key is to find your niche, this way your effort will be leveraged and you can too get 80% revenue from 20% of your client base.