How to Price Your Service
The Mind 🧠 of a CFO
Read Time: 1:40 minutes
Welcome to The Mind of a CFO newsletter. The newsletter is designed to help entrepreneurs grow in business 📈, mind 🧠, body 💪, and spirit🧘.
We will give our CFO's take on a topic to grow your business profitably each month.
In addition, we will provide you with two to three things we are listening to 👂, reading📚, or watching 👀 that we believe will help grow an entrepreneur.
CFO’s Take - How to Price Your Service
How do you set a price for your service? We get this question a lot at a2advisers.com. Changing your price is one of the most impactful things you can do for your business.
A study by McKinsey & Company shows that a 1% increase in price leads to an 11% increase in net income.
The first thing to remember is that pricing is part science and part art. Setting a price entails understanding and calculating your costs, which is science.
It also involves knowing and communicating your value, which is art. This post will dive into calculating costs and ways to determine your value so you can correctly price your services.
Calculating Direct Costs
The science part behind calculating your costs is allocating direct costs and adding a margin. Direct costs are directly related to the production of your service, such as materials, supplies, labor, and software.
To calculate your direct costs, you first need to list each direct expense associated with your service. Then, determine a desired profit margin. This calculation should look like the following:
200 hours of labor at $100 per hour = $20,000
Material = $20,00
Subcontractors = $25,000
Total costs = $65,000
50% profit margin = $65,000
Total price = $130,000
Although this approach is not wrong, it leaves money on the table. In addition, only using direct costs neglects overhead, which impacts profitability. Your pricing structure must reflect all the costs your services consume.
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Brain 🧠 Food
📈📚 Increasing your price is the most effective way to grow your company profitably and have more profit with fewer customers. Easy said than done, right? Read how Disney accomplished more profit with fewer visitors by clicking here.
🧠👀 Everyone loves the family and friends discount, except your business. Check out how a fellow colleague doubled his profitability by eliminating this mindset by clicking here.
The friends and family discount should be a premium
Yes, you read that right. If you genuinely support a friend or family member running a small business, you should not ask for a discount
— The Virtual CFO (@the_virtual_cfo)
Mar 3, 2023
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