Your “price structure” is what you charge for (product or service component or package) and when the payment is due. For example, you might charge an hourly rate, or a package price for an entire job.
Your price structure should meet some or all of these goals:
- more margin per unit sold
- sell more units
- obtain cash flow early enough to enable continued operations
- ensure on-time payments
- reduce customer resistance for reasons of credibility or fear of exceeding budget
- reduce your risk of costs exceeding budget
Some common price structure alternatives used in different industries:
|Per package, not per unit- Package of wood screws||Pro: Sell more unitsCon: May need to discount the package price, e.g. price for package of 50 = price for 35 units bought individually
|Pro: SimplicityCon: Am I paying for more screws than I need?|
|Per deal, not per hour- Consultant||Pro: Customer has certaintyCon: Risk of poor estimate requires raising estimated hrs. by 10-20% to get basis for package price
|Pro: Certainty for budgetCon: Am I paying for more hours than I am getting?|
|Per hour not to exceed x without customer OK- Consultant||Pro: Customer has controlCon: No risk of underestimating||Pro: Control for budgetCon: Control is imperfect — when consultant asks for OK to exceed, I will need to grant it for project to complete
|Retainer plus price of excess units- Lawyer||Pro: Covers setup time/cost; provides opportunity to develop relationship and prove value; customer decision at a lower price point makes it easier for him to say yesCon: Customer who would have paid high package price objects to “nickel and diming”
|Pro: Smaller purchase before relationship is developedCon: No upper limit means lack of control, but customer can always say stop!|
|Base product price plus price for additional options- Car||Pro: Simplicity in product package; sell more options than if they were ordered individually||Pro: Simplicity of packageCon: Buy more options than needed|
|List price less various discounts- Insurance||Pro: Discounted price makes customer feel good; manages price level to risk levelCon: Company may appear high-priced if only list prices are compared||Pro: Discounts make customer feel like a wise shopperCon: Availability and amount of discounts not clear at outset
|“Progress Payments” through the course of the work- Construction||Pro: Match timing of cash received to timing of expenses paidCon: Customer may resist paying before results received
|Pro: Spread out paymentsCon: Cash is paid out before value is received|
|Discount for payment within 30 days||Pro: Motivates timely paymentCon: Some clients pay late and take the discount anyway!
|Pro: Discounts always welcomeCon: May wish to pay later|
|Late payment penalty for payment after due date||Pro: Motivates timely payment; avoids late payers taking a discount as aboveCon: Collecting difficult, but message is sent even without collecting
|Pro: NoneCon: Pressure to pay|
Recommended techniques are:
- Consultant price per hour up to a maximum, requiring client approval to exceed it (balances risk of error in forecast, for both buyer and seller)
- Base price for package of features, plus ”a la carte” charge for options
- Progress payments: these can be crucial to keeping your business solvent!
- Late payment penalty: avoids clients paying late but taking a discount anyway.
Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or firstname.lastname@example.org. See www.tom-gray.com
Pricing, Small Business Techniques
Tags: late payment penalty, price structure alternatives, pro and con, progress payments, recommended techniques