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HOW TO CHARGE FOR YOUR PRODUCTS / SERVICES?

This month’s article addresses the question; "How to charge" which is an important part of the price variable of the marketing mix. There are many options on the market and the purpose of this article is not to make an exhaustive inventory, but to help small business owners consider this variable in order to maximize profitability, reduce his/her risk and hopefully establish a competitive advantage.

For many companies, this part seems quite simple: you offer a product or service that is relatively affordable and when the consumer wants it at a specific point in time they pay for it. There! But even in these simple cases, the payment method must be considered. For example, one of my clients offered payment by check or cash. For 98 percent of customers, this was satisfactory. But for the other 2 percent, it was a problem. So he decided to offer payments by credit card to all his customers. Result: 60 percent of customers opted for credit card payment. This means that in 60 percent of cases, his profit margin was reduced by the expenses attributable to payments by credit card. In some markets, a 2-4 percent fee wouldn’t be problematic, but in others with very low margins, this is a significant cost.

The “how to charge” dimension becomes even more important when the products or services are expensive and they are paid over a period of time.

Let's take the hypothetical case of a computer consultant firm that has the mandate to develop a customized application. The cost is $25,000. This large sum is treated differently than an appointment with your dentist for $120. A common reflex (and it is a valid one) is to request a 50% deposit before work begins and the rest upon delivery of the product. This reduces business risk associated with non-payment. In addition, a portion of the collected money is used to cover the costs associated with development. That said, for some companies, paying $12,500 without guarantees or previous history can be problematic. Another alternative is to suggest a payment plan with specific deliverables at specific dates. In our case, we could imagine 6 deliverables spread over a six month period, which could mean that you could ask for a deposit of $3,571 to start and then for each deliverable, a further $3,571 would be charged. As a result, the net amount is still the same, but each payment is lower, you build a relationship of trust, money comes in more frequently, your business risk is lower and you do not finance operations until the second large payment comes in. For the same amount, you end up more profitable.

This is a valid strategy when your relationship is long-term. In the event that a customer misses a payment on a deliverable, you can stop the production, in accordance with the terms of your sales contract. Therefore, your risk of losing money is greatly diminished. 

But what happens when the amounts are significant and that the customer leaves with the entire product upon purchase? Home appliances and furniture stores would fall into this category. The need for an external financing entity offering some guarantee is paramount. The best option would be credit cards (some larger institutions offer their own financing service, but our emphasis is on small business). You will also need to validate what is offered on the market in your specific niche to compete and negotiate accordingly with your financial institution.  For example, within the furniture industry one can find; singular payment, 12 equal payments, 12 months with no payments and pay later in equal payments, 12 payments without interest, and so on. In certain markets, payment methods and pricing are used as differentiating factors.

Another element to consider is the "on time" payment policy. It is not uncommon to see - especially in the B2B market - companies stretching payments; the more time the money stays with them, the more it can bear fruit.  But would it be better to have it in your bank account instead? In the export field for example, it is common to see a 2 percent discount if paid in 10 days or less, net invoice if paid in 30 days. If something like this is presented in the right manner, you provide an incentive for your customer to pay the invoice faster. The percentage discount and the amount of days can be determined according to your market, what your competitors offer, and your profit margins. What is important to note here is the fact that a discount may be offered for quick payment and the discount should obviously be included in the calculation of your price.

I hope this article has shown you the importance of the "how to charge" variable of the pricing aspect. If you have any questions or comments, feel free to contact me. In the meantime, enjoy the process. 

 

Stéphane Elmaleh-Riel, B.Ed, MBA
Marketing consultant