How do you know how much to charge for your products or services… so you have a profitable business, with enough margin that the money is there for you to get paid?
It’s probably the question I get asked most often by business owners.
“How can I make more money in my business?”
But when we really stop and look at it, they don’t mean how can they make more money. The question really is how can they make more profit?
Because ultimately, if we can make more profit from the money we are already making, we don’t necessarily need to push ourselves any harder to make more sales.
It’s like finding free money!
Of course, profit is what’s left once we’ve taken off the expenses to run our business, from the sales we’ve made.
Some of these costs are really obvious – like freelancers we pay or online software like Canva or Zoom – and some of them less obvious, because over the course of a year there’s likely to be insurances to be paid and training to be done, which all need to be factored in as well.
But today, I want to talk specifically about HOW to figure out what to charge for your products or services. So you can make 100% sure the margin is there, to pay yourself regularly at the end of each month!
The easiest way to do this is to work backwards:
- Work out what profit you need to make
- Work out what expenses you have
- And that will then tell you what you need to be charging up front, to your clients or customers.
Let’s look at a simple example.
Say you have a mug with a logo or catchy slogan on it (or a picture of an alpaca if you’re me!).
Each mug costs you £5 to make, and you want to earn £5 profit on each mug you sell.
Logic says you need to sell them for £10 each, plus VAT if you’re turnover is above the threshold.
Now let’s say you go to advertise your mugs online and see that somebody else is selling them at a lower price, or even the same price, but they’ve got a bigger audience. You want to be competitive and you might be tempted to cut the price – so you think to yourself that you’ll sell the mugs for £7.50, to get the sales coming in.
The problem is that each mug still costs you £5 to produce. Now you’re only making £2.50 per mug, which means that you’ve effectively cut your profit in half and have to sell twice as many, to come out with same end result.
This is where business owners can often price themselves in such a way that, without realising it, they are working REALLY hard to get the sales they need. And then by the time all the costs come out the bottom, they haven’t got the money in the bank they wanted to show for all the hard work.
So let’s talk about how we can reverse engineer what we want to do, in terms of sales.
The first thing to think about is this product or service that you want to sell. Are there costs involved with delivering it?
There are two main sorts of costs – direct costs and indirect costs.
The direct costs are the most obvious things. In our mug example, it’s things like the production of the mug, and the costs to post it to the buyer or for the stall or exhibition space you’re using to sell them.
When it comes to selling courses and online programmes, often the expenses are lower. But if it’s a new offering, do you need to pay a copywriter to help you with the sales page or an email sequence? A tech person, to help you build it all out? Will you use Facebook ads to promote it? Do you want to buy little gifts for the clients that join? Inevitably there will be various costs that you have, in creating, marketing and delivering your programme.
Once you know what they are, you’ve got a number to work with.
It might be that you look at it now and think “well this is my programme, I’m selling it for £1,000 and I have £200 of costs. So I make £800 on each place I sell. I’m really happy with that.”
BUT the thing if this is the only product you’re focused on selling all year, you also need to allow for the fact that there are other costs – hidden costs, if you like – that still need to be paid for and you need to factor these into your business as well.
So the next step is digging out your business bank statements. I know looking at bank statements is not the most exciting thing, but you will thank me for this at some point, when you look back on this exercise and realise that there’s an additional part missing to your puzzle!
Have a look through your bank statements and make a list of all the things you pay out for monthly. Your Canva subscription; website hosting; Clickfunnels or Kartra (or whatever tech you use); your Audible book subscription; liability insurance; basically ANY other costs that you’ve got.
Then have a look to see what else you’ve spent over the last 12 months, on stuff for your business.
Maybe you bought a new laptop. Maybe you paid for a training course or Mastermind. Maybe you invested having your website redesigned. Maybe you’ve had some other expense, that was just a one-off thing. It doesn’t happen on a regular basis, but it’s still something that needs paying for.
All those things you spend money on, then need to be added back into your budget. Because even if you’re not planning to buy those exact things again this year, there’ll be other things that come along! So take those big annual expenses and divide them by 12, to give you a monthly figure.
It’s just like when we looked at personal budgeting. We took the big annual expenses – like holidays and Christmas presents – and divided them by 12, to factor them into a monthly budget planner. This is exactly the same thing.
So if over the course of a year you want to be able to spend £12,000 on training and new equipment and investing in things like rebranding or someone to help to move your business over to a better online platform – as well as the nice to have things, like the pot plant for your desk – then you need to allow for that by putting £1,000 a month into your business running costs.
And all of a sudden, your figures start to look very different.
In your mind, you were thinking you’d make £800 from each online programme you sell.
Let’s say you’re selling 4 x places on your programme in an average month. That’s £4,000 in sales. It’s 4 x £800 worth of profit (£3,200).
BUT out of that profit – when you do this exercise and properly take into account all your annual and regular expenses – you realise you need to be putting away £1,000 a month to cover all these costs.
The amazing £3,200 you thought you’d be earning is suddenly £2,200. Which might not leave you with enough in the bank, to draw the personal income you need for your mortgage and food and bills and holidays and everything else you have and want in your life.
There are 3 solutions for this. They all seem quite obvious and I’m sure they’re things you’ve thought about before, but it’s crucial to consider so you know exactly what you’re doing and how you’ll move forward, to make sure the cash you need is there.
Solution #1 is to make more sales – maybe going for 5 x sales of your programme each month, rather than 4. The extra £800 this generates for you goes a good way towards closing the gap on that extra money you need each month.
So what do you need to do, to make these extra sales? How much more time and energy will it take? Is that something you actually want to do?
Solution #2 is to increase the price of your product or service. If you put it up from £1,000 to £1,200 – that’s also going to bring in an extra £800, if you keep selling 4 places each month. Which might be the more appealing option to you.
And finally, solution #3 is to reduce your expenses, so you need to account for less money each month for costs.
Do you need to upgrade your phone so often? Do you need the training that you pay for? Are there things you’re paying out for each month – like courses or memberships – that actually you’re not getting the value from, because too busy to use them fully?
Again, I know it sounds obvious, but it’s 100000% worth going back through your bank statements and properly reviewing everything. Because every little tweak that reduces your costs, increases your profit!
Of course, it might be that you do a bit of all 3 – selling a bit more; nudging your prices up a little; and reducing your costs where you can.
But the point here is first knowing your actual numbers, and then getting intentional and strategic with how you move forward. It really DOES all stack up to make a massive difference, to make sure that the profit you’re creating from your business leaves you enough over to live the life that you want at the end of the month.
I do know, of course, that the biggest challenge with all of this is finding the time and headspace to do it!
Which is where my brilliant signature programme, the Asset Accelerator™ comes in.
Over 9 months together – including lots of 1:1 time – you’ll leave with a solid, practical and do-able plan to grow your wealth by £300-£500k (or more), over the next 3 to 5 years.
A big part of that is everything we’ve talked about today, ensuring your business is actually giving you the profit you want, as well as getting everything else you need in place (like sorting your Will and pensions and ISAs and investments and so on).
Because if you don’t carve out the focused time to dedicate to this stuff, and get the expert support you need, it’s way harder to get to where you really want to be.
I can’t wait to welcome you inside!
Until next time,