How Much Time Do You Spend Deciding Your Prices?
I was a little floored when I came across an article on setting prices that stated the average time Software as a Service companies spend on pricing strategy is six hours. That isn't a typo and I am quite certain that most small companies approach their pricing strategy the same way: based on gut feel with very little analysis. There are some good online articles on setting your prices - click here to view one.
I suggest that businesses big and small need to carefully decide what their prices will be because it is difficult to increase them at a later date. Setting your price should take into account a number of things. For example, do you want to be a low-margin and high-volume business or fight for a niche that will pay a premium? There are lots of ways to attain success. Just know what your mission and vision are, and price accordingly.
I have found that many mortgage brokers and property appraisers have been in a race "to the bottom" over the past few years. Both have seen aggressive pricing that has resulted in lower compensation per transaction. I took the liberty of creating two scenarios for each with the goal of showing how many more transactions they have to close at lower prices in order to end up even. The results can be found below:
It is important to include your income in the calculations. What's the point of doing all that work in order to break-even? You'd be better off getting a job somewhere else and let them enjoy the challenges that come from owning a business.
The above chart makes one thing clear: It is very easy that the required amount of transactions you complete is far greater than the % by which you reduce your prices. In the case of a mortgage broker competing only on price, their commission will drop substantially and they'll be required to complete quite a few more deals. This often results in them having to hire additional staff, making matters worse.
The same goes for appraisers. And with the profit per deal so small, they have to make up for it with substantially more transactions.
Either strategy can be sound, so if this isn't an article bashing one over the other. It's really an article to highlight why it's so important to spend more than a few minutes/hours on coming up with your pricing strategy. It has a profound effect on your company's org chart and cost structure.