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Selling services? Think price not wages

Millions of small businesses sell personal services like consulting, website development, or janitorial services, instead of something tangible like a computer or a kumquat.

Unfortunately, pricing a service is not as intuitive as a tangible product. Consequently, service businesses too often don’t charge enough to sustain themselves profitably.

Recently I received a question from one of these owners about how to price the services of their new cleaning business. Perhaps my answer to them will help you.

Don’t make the professionally fatal mistake of comparing what you charge customers to deliver a service to how much you would expect to make as an employee. Doing so, to paraphrase Mark Twain, is like comparing lightning to a lightning bug. You have to think pricing, not wages. Here’s why:

1.  You’re a business now, which means you have price lists, not wage lists. And you collect revenue, which has to produce the gross profit to cover all expenses, including the salaries of the owners.

2.  If you have no employees you’ll work more hours in a month than you can bill for, like time spent on marketing, selling and administrative tasks. Consequently, your business must collect enough revenue to cover the time and expenses of performing or outsourcing those tasks.

3.  Until you have employees, you’re a 100% extension of yourself, which means your only revenue leverage is the hours you can bill multiplied by your hourly rate.

CC photo via Pixabay

CC photo via Pixabay


Use this pricing logic to get you started: Determine all monthly expenses, including paying yourself as an employee. If you’re home-based include a reasonable office overhead factor and don’t forget payroll taxes. Then, divide that total by the number of billable hours you have the capacity to perform in a month (not the hours you actually perform). That quotient is your breakeven rate.

But in order to sustain your business long-term, you have to make a profit, so the rate you charge customers is somewhere between breakeven and the impact of three more factors:

1. What the market will bear (competitive pressure)

2. How much you need the sale (badly at first)

3. The commitment a customer is making to you (customers who sign annual contracts get discounts)

This method should cover most variables you’ll face when proposing to a prospect. Plus it will help you see the negative impact when you deliver less than capacity, or the dynamic effect of adding employees.

Write this on a rock … When selling services think pricing, not wages.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

RESULTS: Would your business be a prospect for outside investor capital?

The Question:
Would your business ever be a prospect for outside investor capital?

15% - Yes, our long-term growth plans is to acquire venture capital.
8% - Yes, but only angel investors we can buy out later.
0% - We want to acquire investor capital but don’t know how.
0% - We’ve already acquired outside investor capital.
77% - We don’t need no shtinkin’ investors.

Jim’s Comments:
As I’ve said - and written - many times, most small businesses are not prospects for outside investor capital. It’s difficult to get, it’s not practical to manage, it’s troublesome to account for, it can be maddening to deal with the investors, and the long-term expectations of the founders and investors are almost always different. So I wasn’t surprised when over three-fourths of our respondents said, “We don’t need no shtinkin’ investors.” And I wasn’t surprised that 15% said they were planning to pursue outside investors in the long term. But I’ll wager that of that group, a very small percentage will actually finalize an outside investment capital deal.

When you get a few minutes, go to this link and read some of the articles on capital acquisition.

Thanks for participating this week. And be sure to give us your position on our new poll below.

It’s time to adapt to the new age of technology

Henry Ford is generally credited with being the creator of the assembly line. To meet the demand for his Model T automobiles, Mr. Ford knew that just hiring more people wouldn’t be enough to mount the challenge of building Ford Motor Company — it would take technology.
His technology was crude by modern standards, but it did what technology does: leverage the productivity of human beings. During the year Ford’s assembly line was first put in service, he wasn’t just using technology he was creating it. He also turned 50.

The list of technology options today is long and growing and available in features-rich products that support and improve virtually every business task.  How much are you adopting technology to help you leverage the humans in your organization?

Yes, some employees don’t want to embrace technology because they think they’re too old, or have gotten too far behind the curve. Hogwash! There is so much point-and-click technological capability these days that you can ramp up on any learning curve within a matter of days, if not hours. And besides, rapid changes in technology means you can catch up with anyone by being prepared to fully adopt the next generation of capability that’s usually never more than 90 days away.  You can literally go from being technologically illiterate to being an application expert within weeks. But you do have to take that first step.
The great Roman statesman, Cato (234-149 BC) began studying Greek at the age of 80. When asked why he would contemplate such an undertaking at such an advanced age, he replied, “This is the youngest age I have left.”

Regardless of your age or level of technological proficiency, learn how to leverage technology. No excuses! Remember, it’s the youngest age you have left.

A small business lesson from what Target did right in Canada

In 2011, Target Corporation, the successful national retailer out of Minnesota, announced they were expanding into neighboring Canada.

The launch was aggressive; by assuming almost 200 spaces vacated by a recently bankrupted chain, Target Canada opened 133 stores in less than two years, including one just 500 miles from their headquarters in Minneapolis.

Having successfully gone head-to-head with U.S. competitors who’d already expanded successfully north of the border, why wouldn’t Canada be a good opportunity for Target? But less than two years and $2 billion in losses later, Target Canada announced it was closing all stores and seeking creditor protection.

This story isn’t to call attention to the many things Target did wrong, but rather to highlight the one thing they did right: They did not become victims of the Concorde Fallacy.

In 1956, the British and French governments, along with aircraft and engine manufacturers, began the process of building a supersonic airliner. From the start the Concorde was plagued by prohibitive budget overruns. In fact, long before the wheels came up on the first commercial flight in 1976, the partnership knew the venture would never sustain itself financially. And yet they couldn’t bring themselves to shut it down.

By the last Concorde flight in 2003, the Anglo/French misadventure had become so legendary that evolutionary biologists coined the term, “Concorde Fallacy,” as a metaphor for when sticking with a troubled project costs more than starting over with a new alternative.

Ego and sovereign pride by the Concorde partnership caused the willing suspension of economic reason. Plus they failed to apply the lesson of sunk costs, which is that, “Any decision to continue a financially unviable project shouldn’t be based on what has already been spent.” In a small business, it might sound like this, “We’ve got too much invested to stop,” or “We just need to work harder.”

Pride can be productive or it can be a problem. Consider this handy admonition a mentor once gave me that I have named the Concorde Question: “Do you have a fighting chance or just a chance to fight?”

Arguably the hardest decision any small business owner faces is when to end a business pursuit, whether a product, an acquisition, or the mother of all anguishing decisions – to close the business. Should you, like Target, heed the sunk costs lesson to avoid your Concorde, or is a breakthrough just around the corner?

Being a small business owner isn’t for sissies.

Write this on a rock … Avoid the Concorde Fallacy by answering the Concorde Question truthfully.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

RESULTS: How will low fuel prices impact your sales and profits?

The Question:

Lower crude oil prices are expected to keep fuel prices low all year. How much will this impact your sales and profits?

19% - It will help to both increase sales and lower expenses.
38% - It won’t impact our sales much, but a reduced fuel budget will improve profits.
11% - We should see improved sales but don’t use a lot of fuel.
32% - It’s unlikely we’ll benefit from lower fuel prices in any way.
Jim’s Comments:
Now that crude oil has escaped the clutches of speculators and dropped well below $100 per barrel, a number of interesting things are happening.  Working-class folks have gotten what is essentially a huge tax cut, and global economies should benefit. But it is also creating interesting dynamics regarding currency exchanges and geopolitics.

We wanted to know what this drop in such a widely used commodity would mean out here on Main Street, so last week we asked our small business audience about it. I was surprised to see less than one-fifth allowed that the lower prices would benefit them in both sales and expenses. This response is likely a result of the new, more virtual economy, which I think was also why one-third said they wouldn’t be impacted at all by lower oil prices.

As you may have seen in my 2015 predictions, I believe you can count on oil prices averaging less than $70 per barrel for the rest of the year.

Seeking due diligence in business

As we conduct the due diligence on what’s next for our business, we seek the information that will help us acquire knowledge and create conditions that minimize the risks and maximize the opportunity.  After all, we want to be as certain as possible that our next step is the right one, don’t we?
That’s an interesting word, certain.  Webster says it means fixed, settled, determined, not to be doubted. But it’s a word that isn’t often found in business plans.
The 19th century president of Harvard University, Charles W. Eliot, said, “All business proceeds on beliefs, or judgment of probabilities, and not on certainties.”
What do you think the marketplace — indeed, the world — would look like if business had been built more on certainties than beliefs? I think we would probably be closer to wearing a stone ax on our belt than a smartphone.
It’s important to understand that on the entrepreneurial scale, each of us resides somewhere between the foolhardy and seekers of certainty. The challenge for entrepreneurs is to know when to seek certainty and when to move forward with our beliefs.
No position on this scale is better than another — the world needs all kinds of entrepreneurs. But understanding where we reside on the entrepreneurial scale helps us make better business plans.