I came across a very useful article in Donut where they discuss how to price your product which for inventory providers is easier said than done.
Why?
Because we are battling two fronts: the amount the client is willing to pay versus the actual costs of providing the service. Clients inherently want everything for nothing yet they also want very detailed reports however the time costs involved invariably mean that we have to deal in volume but with as many time saving efficiencies as possible!
And as the article shows; ‘ask people to pay too much for your product or service and they will stop buying. Ask too little and your profit margin slides or customers assume your product is poor quality’.
So how do you set your prices that is both attractive to your clients as well as to your pocket?
- Know the market You need to find out how much your customers will pay, as well as how much competitors charge and this includes letting agents as many are now doing the reports in-house so check their websites as under the Tenant Fee Ban agents are compelled to display their fees both locally and online. Don’t be lulled into simply matching the price your competitors are asking as that could be devaluing your reports. Be sure that all your costs – both direct and indirect – are covered.
- Choose the best pricing technique Cost-plus pricing involves adding a mark-up percentage to costs; you may need to do this if the agent is looking for a commission that’s to be included in your overall pricing; don’t forget the VAT if that is to be added! Value-based pricing is determined by how much value your customers attach to your reports so you need to decide whether you are going to provide a very detailed reporting service which takes more time = more cost or you are looking to deliver a basic report which can be more time efficient but won’t necessarily win you more instructions so you need to decide very early on what your strategy is before making any forecasts.
- Work out your costs You must include all direct costs, including money spent developing your service. Then calculate what percentage of your fixed costs (overheads such as a rented desk of office space, utilities / rates and of course the clerks wages (employed) or fees (self employed). By adding all of these costs together and divide by volume i.e number of reports your are or expect to deliver in order to produce a break-even figure.
- Consider cost-plus pricing You will need to add a margin or mark-up to your break-even point. This is usually expressed as a percentage of break-even. Industry norms, experience or market knowledge will help you decide the level of mark-up. If the price looks too high, look to trim back your costs such as moving to a lower cost business premises or indeed work from home or review the number of clerks you need to work with to realise your targets and then reduce the price accordingly. Be aware of the limitations of cost-plus pricing, because it works on the assumption you will deliver all your reports against the targets you set i.e 50 reports a month for 12 months of the year. If you don’t meet those targets then clearly your profit is going to be either lower or in fact non existent potentially putting your business into the red.
- Set a value-based price You’ll need to know your local market in order to set a value-based price. For example, the cost to you to carry out a 1 bed property report is £35 however the local market is paying between £50 and £75 per report; this is then the potential market value.
- Think about other factors Even if you are nowhere near the VAT threshold (£85,000) you need to forecast any potential impact on your price structure in case you read that threshold within your current trading financial year and how it may then impact on your margins especially if your customers are not VAT registered. You might need to calculate different prices for different areas as often regional prices vary wildly and may then impact on your cashflow. Many of the larger corporate agents have a 90 day + payment policy and if you agree a 30 day payment term they are often still slow to pay invoices so consider how you will manage late payments; what will be your terms and how will you chase any debts owed and the costs involved in doing this.
- Stay on your toes Prices should not be fixed for the long term as your costs, customers and competitors can and do change frequently, so in order to keep up with the market schedule in time to reassess your rate card and keep a close eye on your competitors so that you notice any shifts quickly and are able to react or at least be armed with the info should the client come knocking asking for a reduction in fees (this happen more than you might think!). Talk to your customers constantly so that you remain ahead of their needs and adjust your pricing to reflect the quality of your service rather than involve yourself in the race to the bottom.
As Warren Buffet quite rightly states: