Smarter Pricing Strategies: Hidden Versus Obvious Costs

I’ve been in business since 2002 and one of the most common complaints I’ve heard from my online business clients is that they aren’t earning enough money.

In most cases, the business owner had plenty of clients — and typically more work than she could hope to complete while managing a family as well. The problem?

When my clients would figure out how much  money they were making per hour, the resulting number would often be in the single digits.

The problem?

In some cases, the problem resulted from choosing an excessively thrifty target market — which we’ll talk about later.

But in most cases, the problem resulted from owners only considering the obvious costs of providing their services or products.

Let’s talk about some of those obvious costs first.

Obvious costs

A big mistake small business owners make is only considering obvious costs when they build their pricing structures. For example, a web designer might charge $20 for a graphic that takes 15 minutes to build.

At first glance, the graphic designer calculates that she can make 4 graphics in an hour and is therefore earning $80 per hour. Sounds wonderful, right?

Or perhaps a cloth diaper maker sits down and figures out that she can sew one cloth diaper for $3.35. So if she sells 30 diapers for an even $10 each, she’ll have profited $200, right?

Not quite so fast…

Hidden costs

Yes, I’m repeating myself. But this point is so important.

Remember that web designer who thinks she’s $80 per hour? She neglected to account for the two hours of email and phone consultations with the client necessary to build the design concept, and the hour she spent later revamping the graphic when the client changed her mind about what she wanted. (Of course, some of this can be taken care of with a contract. If you’re a service provider, you do have a contract, right?)

In reality, the web designer can only create one graphic every three and a half hours. At $20 per graphic, the designer is only earning $5.71 per hour. And this doesn’t count the other hidden costs that we’ll talk about in a minute.

Let’s take a closer look at our cloth diaper seller.

She’s a pretty fast seamstress, so it only takes her two hours to create one cloth diaper. That means she has 60 hours in that pile of 30 cloth diapers she’s selling. Once she figures out how much she’s made, the profit doesn’t look too good: Only a measly $3.33 per hour!

And that’s not all.

Neither the diaper seller or the graphic designer have taken into account the hidden costs of:

• Time researching/purchasing materials
• Time spent providing customer service
• Labor to scale your business beyond what you can personally accomplish
• Advertising and marketing
• Insurance and liability coverage
• Miscellaneous items such as office supplies, computer and printer and more.

As you can see, even the $5.71 and $3.33 starts to dwindle when you start looking at the full picture.

What to do?

Now that you know the hidden costs that are likely to eat into your profits, you can develop and accurate picture of how much it actually costs to product your product or service.

Now, you just need to compare that picture to the price structure you currently have.

Are you making a decent amount of money, peanuts — or actually paying your customers to buy from you?

If you’re in the later two categories, you need to follow the Six Steps To Raising Your Prices that I outlined in the first installment of this series.

Tomorrow, we’ll talk more in depth about restructuring your packages…