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When and Why Price Is an Issue

Written by: James Yuille

Article Overview: Far too many solo and small business owners go out of business because they get their price model wrong. And it's not because their prices are too high. Read this amazing story about why a major Company was worried about a key supplier's price structure...

When and Why Price Is an Issue

I was discussing price points with a client recently. As the conversation continued, the client referred to the company that provides their IT support. Ironically, the IT company is a client of mine… this gets interesting!

Her point of view was that this company undersell themselves. “Their hourly charge is way too low” she told me. I asked why it was of concern. her response was really interesting.

“I need my suppliers to charge me a fee sufficient to allow them to stay in business in order that they can continue to provide me with the level of service I both expect and need.

“If they don’t charge enough, they go out of business and I’m left with no support and I have to re-educate another supplier. I trust these guys and I don’t want to have to go through the process of building trust with someone else.”

Powerful words indeed.

Frances indicated that she was happy for me to relay the message so I called the IT company today. My previous conversations with them had been about their fee structure; I had recommended an increase. They told me that they had increased fees by 10% this year and that their clients hadn’t even noticed.

My recommendation?

Put them up another 10% or even 20% until someone notices and complains.

Here’s the thing…

Most people entering a service business start with a theory that they must charge a low fee initially because they have no track record and have to compete. They start to win some business and develop a reputation. Now they’re busy but not making any real profits.

As they get new customers, they put their fees up but fear that charging their older clients more, the client will object and leave. So they keep on charging the lower fee and gradually begin to resent the client because they’re unprofitable. Ultimately they part company because the client is unhappy with the service.

“They were good once but they got too big” is the response.

The moral?

As a start-up, charge fees that will sustain a business, not fees that keep you in a job.

A recent article in an electrical contracting magazine (I can’t remember which; it was something I read casually) reported that the minimum sustainable hourly fee for an electrician billing 38 hours per week was about $90 per hour. That amount is necessary to cover wages, taxes, his vehicle, tools, insurance etc. (NB This is $Australian; interpret as you need for your own currency.)

Sounds about right to me…

What are you charging? Enough to sustain a business or just enough to keep your job?

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