Being a boss: on-the-job training

There is a common situation that plays out in almost every kind of business. An employee observes the boss carefully – let’s say the employee is a carpenter and the boss is a contractor – and the employee decides he’d be able to do what the boss does. Why should he settle for an hourly wage, while the contractor makes all the profit on the job? So the employee leaves his job and strikes out on his own as a contractor, figuring now he’ll have his own business and make all the profit.

Maybe he does, and maybe he doesn’t. If he doesn’t, it’s most likely because, though he’s a fine carpenter, he’s not a successful manager. He doesn’t know how to find customers. He doesn’t know how to budget a job. He doesn’t know how to schedule his workers. He’s not buying materials at a good price. And on and on.

The point here is: it takes a different skill set to be the boss, and you have to master those skills to run your business successfully, even if you’re a one person company. Being a boss is something you learn on the job, and you have to learn it quickly. Be aware that while you may have work experience, you probably don’t know everything a boss in your kind of business does, until you’re the boss.

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How much should you charge?

There are many factors that influence a product’s success in the marketplace.  Price is just one, but it’s an important one.  The wrong price will dampen sales, even destroy them altogether. The correct price for any product–goods or services–is what the market is willing to pay for it. The market doesn’t care what the product costs you to make or to buy.  The market will pay a price that reflects the product’s perceived value.  If you find the market values your product for less than it takes you to make or buy it–or less than you can charge for it and still make a decent profit–it’s time to find a cheaper supplier — or a new product.

Scarcity may also determine market price. An oversupply of the product in the market forces price down, as competitors lower price in an effort to undercut other sellers, and move inventory. The danger in playing this game is that competition will push prices down so far that the market will not be profitable for anybody. Of course, price goes up when the product becomes scarce.

Some products are more sensitive to price than others. Consumer electronics are notorious in this regard. Competition forces prices down, to the point where profit margins are dangerously thin. That’s why so many consumer electronics retailers have come and gone.

So how should you price a product you sell? As we’ve noted, your costs don’t matter to buyers. But you need to know your costs because they tell you your break-even point, the point at which your cost for the product equals an acceptable price to your customers — that is, zero profit and zero loss for you. You must sell for more than your break-even to make a profit.

To determine your cost for a product, don’t forget about your indirect costs — which you must add to your direct costs. Direct costs are the costs of making or buying the product, including wages, freight, and any other charges which can be directly attributed to the product. Indirect costs are an appropriate portion — which you determine — of what you pay for administrative and accounting services, office supplies, telephone, and other charges not directly connected to the product. Each product you sell should bear a portion of your indirect costs.

Your pricing should support your marketing strategy.

If your strategy is to win customers away from your competitors fast, price lower than your competitors. Your new company may be able to win a significant piece of the market, establishing your customer base, and your presence in the market, quickly. But you must be able to live with a small profit margin.

If your strategy is to position your product as a premium product, and show the market why it’s worth more than competitive products, then price higher than your competitors. You will likely win fewer customers, but will generate bigger profit margins. This strategy may not be appropriate for your startup business, unless you have the money to mount the aggressive promotion campaign often necessary to support premium pricing.

If your strategy is meeting your competition, price your product about the same as your competitors price theirs. This puts you head-to-head with the competitors, and you must be prepared to show the market, point by point, why your product compares well with what they offer.

Note carefully that when customers evaluate your product, they see service as a part of that value, essentially part of the product itself. Quick delivery, your attention to their needs, adequate inventory are all factors that can affect customers’ buying decisions. They may pay you more for a product they can get elsewhere, if they believe your excellent service provides better value.

Markets change, competition changes, and products change. It’s vital that you monitor all three carefully, so you can review your competitive position, and adjust your pricing, if necessary. This must be an ongoing process. Stay ahead of your competition.

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Use a strong leave-behind printed piece

Many sales simply cannot be closed in one call, and it’s important to give your prospect a clear, persuasive printed piece—a leave behind—to help him or her recall your presentation as he reviews your proposal after you’ve left. Or as he tries to convince others to share his enthusiasm for your product.

Your leave-behind should use the same appeals and make the same sales points that you made in your presentation. Otherwise you’ll confuse the issue and make it difficult for him to remember what was discussed at your meeting

A leave-behind is especially important in a two-tier business sale—with the person being presented to must get approval, and often money, from others you can’t get to see yourself. With that you leave-behind you provide him with materials that help him communicate your pitch to others.

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