How do you price

[peterjhale]

Well, following on from the debate about pricing I want to move this on one stage further

We have talked about price - but how exactly do you set your price ?

For our online business plans http://www.teneric.co.uk/sample-business-plan.html we have priced at the average for the market and provided over and above added value bonuses

We have tried putting the price up and (almost) selling for free - and none work

The first - price is too high for a punt (remember that most people will have never heard of us) and the second people see it as too cheap so it can't be that good.

For the sample plans we have settled for £29.95

How do you set your pricing ?

[Cougar]

OK. Interesting area. I am sure there will be some lively debate on this.

Before I get anywhere near pricing, I work out cost. If I do not know my costs, then I do not know whether I will make a profit or a loss when I set my price.

However, I might choose to make a loss by setting a price at less than cost when I'm courting particular target clients, or to get a peice of work in competitive tender but I won't know how much of a loss I'm in for unless I work out and know what my costs are first.

Then I have to consider (as per my comments elsewhere in the forum) to what extent what I am pricing is commoditised, bespoke consultancy or somewhere in between. Here what my competitors do is also a factor. My "rates" - for want of a better word - can vary sixfold between these parameters that range from commodity through to tailored consulting.

I do not generally work on hourly rates like a lot of accountants, lawyers and tax advisers do. I prefer to fix a price for an assignment and agree further fees if there's further work to do. If I get my price too low then that's my problem because I failed to cost it adequately in the first place. This points up the importance of costing again.

In one sense cost and price have everything and nothing to do with each other. For me cost informs price, but does not determine it. Cost is a starting point for a pricing decision.

Sometimes, the type of work lends itself to a success based fee. Then I will price higher as there is usually more risk for me. So risk, as well as time deployed and overhead costs, is a factor in my pricing.

Once I know my cost, there is in theory nothing stopping me pricing as high as I can get away with.

[Ian J]

Luckily I don't have that problem as I am paid a commission or fee by the finance company for successful introductions.

[Cougar]

Ian - I see what you are saying.

Presumeably though at some point in the past you calculated that the commissions you receive would cover costs and give you a margin for profit?

Presumeably your costs also include abortive introductions and time investment in people/businesses that never get to being an introduction at all. So I assume you would have doen something like working out that you need a certain proportion of introductions to be successful and at certain levels of commission, in order to know that the "price" you are paid (i.e. the commissions/fees) actually work for your business model?

A lot of presumptions here! Just interested in how you got to know that accepting the price offered would actually work OK.

Philip
Philip

[BIZAL]

Cougar has a clear workable policy i.e. work out all your cost to deliver the service inc prep time, travel etc and works out his margin from there based on what he feel he can get away with.


My only real comment to add would be for small companies to discount from a high price rather than giving a low price to start with and hence create a higher percieved value for your service i.e. our day rate is £800.00 per day but when we first started selling our services we discounted to £500.00 per day in return for being a reference site.

[inbakumar]

We have different pricing policies for the three strategic business units (SBU) of the company. Here how it works in general:

(1) Finance/management consulting

We charge a daily rate for our consultants. It is set at about 60% of what the Big 4 accountancy firms charge for similar work. The consulting is aimed at large blue chip corporates and financial institutions in the City.

(2) Finance brokerage

For some products, we get a fee from the lenders and for others we charge a fee from the clients on a 'success based' basis. We also operate a minimum fee policy as some businesses are too small for us to make economic sense.

(3) Provision of high risk finance (mezzanine/equity)

This is a specialist area where the risks are high but the returns are high too. The competition is limited for these types of funding but since we risk our own capital, we tend to be very careful. Normally we tend to work on a profit-share basis with the clients. Depending on the level of investment, risk taken etc. the price varies. We have a 'price floor' and a 'price ceiling' guidelines to make sure that we have the flexibility as well as the ability to maximise profits.

In general though we find most of our clients in the SME sector operate a 'cost plus' pricing policy. It is not the most scientific but it is easy to understand and simple to operate. The main problem with this pricing strategy is that if you fail to meet the anticipated volume then you are in trouble.

Regards,

[Cougar]

Hi Joel -

I have seen/heard the term "mezzanine" a number of times in relation to finance. What does it mean?

The only understanding of this term I have is in relation to building structure eg in art galleries and hotels, as in when directed to go to "the mezzanine level" for something - which usually seems to be between two normal floor levels in the building.

So what does it mean in the world of finance please?

Thanks
Philip

[inbakumar]

Hi Philip,

Here is my simplistic explanation.

‘Mezzanine finance’ is a type of ‘debt’ that from a security perspective typically ranks behind senior debt finance such as traditional bank loans, but ranks in front of capital provided by shareholders. This means that the mezzanine finance provider has a second claim on a company’s assets should the loan need to be recovered. Loans are usually secured with a second charge on a company’s assets such as property, plant and equipment.

The increased risk and the fact that there is often little security available, means that an increased return is required to justify the risk taken by the mezzanine funders. The benefit of mezzanine finance is that it often bridges the gap between the debt a high street bank will provide, and the funds provided by equity providers (using your building analogy – the floor is the high street bank debt which has the lowest risk and the ceiling/second floor is the equity capital which has the highest risk. The mezzanine debt is located in between the two. How higher-up varies depending on the situation).

The amount and cost of funds under a mezzanine facility will depend on many factors including industry sector, historic performance, credit ratings, seasonality/predictability of revenues and forecasts for future cash flow and profitability as well as the strength of management, nature of a company’s financial backers etc.

Hope my explanation helps.

Regards,

[Cougar]

I think I've grasped this now; really appreciate your time de-mystifying it! In my future plans I'll remember this if I need a bridge between the ground floor and the loft level financing!

Philip

[Inzvestor]

You need to look a 4 factors

1. Supply
2. Demand
3. Cost
4. Competition

Supply and Demand are the biggest factors
What the competition sell their products for is next
The last factor is your cost price

If you can match the competition (or sell higher by adding value as well), and that price is above your cost price, supply is plentiful and demand is high then you have your equation worked out.