Pricing being front of mind is not a surprise though. Costs have climbed steadily during the 2020s, and as most owners didn’t reprice enough to keep pace, they’re feeling the pinch in the bottom line now. Rising costs still aren't the reason to raise your prices, but they are the reason you need to know what your costs actually are.
Once you decide you’re going to raise prices, the biggest challenge is deciding what the new prices are going to be. When you’re at this point, the best way to start is to break the price into components. An easy way to approach this is to treat it as a simple equation (I am a CPA after all):
Your Cost of Delivery + The Value You Add = Price to Charge
Your Cost of Delivery is the “Floor,” or the absolute minimum you'd accept (if your price is below the Floor, you should probably walk away from the sale); the Value You Add sits on top of it (the thing that converts most sales); and the gap between the two is what you keep. Separating those two allows you to work out the cost by looking inward at your business, and the value by looking outward at your client, without muddying the water for the other.
So, to help you analyze your prices, we're going to break pricing down, and tackle it in three parts:
- Today: your cost of delivery.
- Next issue: the value you add.
- The issue after that: how you roll it out to your clients.
When I’m helping people with their pricing, I approach the cost side as there being three distinct types of costs.
The first group tends to be the most obvious - Direct Costs. This includes things like materials and inventory, subcontractors, freight, and the hours your team puts in.
The second group is harder to see, and it's where the profit quietly starts leaking - I call this group the Overlooked Costs. This tends to be the work nobody bills for: scoping calls, revisions, project management, the email chain that goes from 2 emails to 20 over a week. The labor add-ons: payroll taxes, benefits, insurance, software licenses. And your own time, which tends to get discounted, sometimes all the way to $0, rather than priced at what it's actually worth. If you sell products, it's the returns, the damaged units, or the shipping you ate to keep someone happy.
Group three includes Overhead Costs - things like rent, software, liability insurance, admin salaries. This is the one that catches people off guard, and I get asked about it directly: “Should we factor those costs into our price?” My answer is always the same: “You don't have to. But if you don't, it's coming out of your profit and your take home pay.”
When we break things down again like this, the impact of leaving a cost group out becomes more obvious. In short, leaving out a cost means your Floor is no longer your Floor. It's a number that looks safe but isn't. You end up taking work at prices that cover the job itself but also cause the business to go backwards. And you typically won't see it happening until the year is over.
If it helps, I still miss this from time to time. I'm supposed to be the numbers guy, but I'll still quote something off the back of a napkin because I've priced that kind of work a hundred times and I figure I know what it costs. When I sit down and lay it out properly though, the two prices come in 15% - 20% apart. That's a discount I never knowingly agreed to give.
Now that you have all of that, here's what I'd do this week: Start simple, and pick one job. Not the one that went sideways, and not your best one either, but the one you'd call typical or average.
Then, work through the three groups in order, starting with Direct costs. If you get stuck and find one of them is hard to pin down, approximate it rather than skip it - for example, take your annual overhead and divide it by the hours you actually deliver in a year or the units you actually sell. That gives you a rate you can attach to any job or order, and while it isn't exact, it's better than ignoring it altogether.
Once you've done that, add it all up and write the number down somewhere you'll find it again. Then look at what you charged.
~ Nolan