First Person: Protecting Your Small Business Profits

Yahoo Contributor Network

When starting a new service business, one of the hardest decisions to make is how much to charge for your work. I see many friends starting businesses and they often turn out unprofitable because of the natural temptation to undercut your competition in order to get a foothold into the market. While that method may get you sales in the short term, it could be a very poor choice over time. Here's why.

Entrepreneurs tend to think of pricing in very simple terms, but that is often a mistake. When deciding how to price your services, think about how much it really costs to provide it. Services are different from products as there are generally no or very few physical parts that are included in a service. Therefore there is often no obviously tangible cost to provide it. However, there are indeed costs involved, including the time it takes to provide the service, the marketing costs involved, taxes and other fees.

Here is an example, albeit a simplified one. Let's say that you provide Service X. You want to make a profit of $30 per hour, so you decide to charge $35 per hour to accommodate incidentals. Easy, right? Not so fast. Out of that $35 you need to account for local, state and federal taxes. You also need to account for a portion of the fees you pay for marketing, phone service and Internet access to communicate with your customers. Let's assume that the total of all of the things you pay to create and provide this service comes to a total of $14.64. All of a sudden that $20.36 you are left with is not the profit you had in mind, is it?

Also, think about your customers. When I started providing in-home computer services. I figured that having the lowest price would be the best way to get my name out there. While having the best price was nice, but what message did that send to my potential customers? Consider this: at what price point do customers begin to think that your service is "cheap" as opposed to just "inexpensive"? And if your competition is more established in the market, they may be able to start a price war that can leave you with no customers at all.

The solution? I started to think of my services in terms of overall value, not just a simple dollar amount. I recognized that there are costs involved with any product or service offering, and took the time to determine what my services were really worth. I calculated the true costs of providing my services so you I could protect my profitability long-term. One of my first clients was nice enough to tell me that I should be charging much more than I asked for, and that advice stuck with me. My best customers gladly pay me for my work, because they see the value in it. Though I tried it in the beginning, be smarter than I was. Do not sell yourself short in an effort to get yourself out there. Set your price intelligently and stick to it. I found that the customers that wanted me to always cut them a deal turned out to be the most troublesome. Promote the overall value of your services and build your business to be successful and profitable from the start.

*Note: This was written by a Yahoo! contributor. Do you have a story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

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