Your Prices Are Based on What?

A PRICE THAT CUSTOMERS WILL PAY IS NOT NECESSARILY A PRICE YOUR BUSINESS CAN SURVIVE.

How much should you charge?

Ask that question and somebody will tell you to look at your competitors.

Somebody else will tell you to calculate your costs and add a markup.

Then somebody will tell you to charge what you're worth.

Wonderful.

What the fuck does any of that mean for the business that actually has to deliver the work?

Your competitor's price is information. Your costs are information. What customers value and what they will pay are information.

None of them, by itself, answers the entire question.

Pricing has to connect the customer's decision to your economics. Marketing guidance recognizes that costs, customers, distribution, and competition all belong in that analysis. [1]

But a list of considerations doesn't pay the bills.

You still have to make the numbers work.

Your Competitor Doesn't Have Your Business.

A competitor sells a service for $500.

So you charge $500.

Why?

Do you know what their employees cost? How they acquire customers? How many jobs they complete? What is actually included? Whether they own the equipment? Whether another part of the business supports that offer?

Do you even know whether they're making any fucking money?

They might have better purchasing terms, more efficient delivery, more repeat customers, or a narrower service than you think.

They might also be losing money.

Their price tells you something about the offer the customer sees. It does not give you access to their operating economics.

By all means, study the alternatives your customer can buy. If your price is higher, understand why someone would choose you. If it is lower, understand what makes that possible.

But don't copy a number and call the financial analysis finished.

That's guessing with a reference point.

The Sale Is Not the Profit.

Consider a hypothetical service priced at $1,000.

Direct labor costs $350. Materials cost $150. Other costs that vary with delivering the job total $100.

That leaves $400 before acquisition and fixed operating expenses.

Now suppose acquiring the customer costs $250.

You have $150 left.

Not $1,000.

Not $400.

$150 to help support the rest of the fucking business.

Contribution is what remains after the relevant variable costs, available to cover fixed expenses and then contribute to operating profit. It is not automatically net profit. [2]

For this example, assume each job comes from a newly acquired customer and adds exactly $250 in acquisition cost. Assume the $600 delivery cost also varies with each job. If advertising is a fixed commitment, customers buy repeatedly, or labor is salaried regardless of volume, the model needs to reflect that instead.

Don't subtract the same acquisition cost twice. Don't assume it disappears every time a customer doesn't buy.

This is a hypothetical analysis based on an understanding of how systems work. These figures illustrate the mechanism; they aren't a client result or an industry benchmark.

Now add $15,000 in monthly fixed operating costs, including the assumed cost of management and owner compensation. Those costs are separate from the delivery and acquisition amounts already counted.

At $150 remaining per job, you need 100 jobs per month to cover the $15,000.

That's operating break-even under these assumptions—not a return on your original investment, not repayment of debt principal, and not money available after financing and taxes. The basic calculation divides fixed costs by contribution per unit. [3]

You have identified what the model requires.

You have not established that the business can do it.

What If You Can Only Deliver Eighty?

Suppose the existing operation can reliably complete eighty of those jobs per month.

Eighty jobs produce $80,000 in revenue.

They leave $12,000 after the assumed delivery and acquisition costs.

Subtract the $15,000 in fixed operating costs.

You are down $3,000 before financing and taxes.

The calendar is full.

The business is losing money.

And somebody wants to congratulate the marketing department for keeping everyone busy.

At this price, with these costs and this capacity, full is not enough.

“Sell more” requires an explanation. Can the business increase output without hiring another crew, adding equipment, paying overtime, or compromising the work?

If capacity increases only after costs increase, recalculate the economics of that actual plan.

You cannot use the cost structure of an eighty-job operation to promise the results of a hundred-job operation it cannot currently deliver.

Your Ten-Percent Discount Didn't Cost You Ten Percent of the Remainder.

Take the same service.

You reduce the price from $1,000 to $900.

The customer gets a $100 discount.

Delivery still costs $600. Acquisition still costs $250.

You now have $50 left instead of $150.

A ten-percent price reduction removed two-thirds of what was available to cover fixed costs and profit.

You would need three jobs at the discounted price to produce the same contribution as one job at the original price.

And the business in this example was already losing money at full capacity.

Here is the comparison, holding those per-job costs and the $15,000 fixed-cost assumption constant:

The 100- and 300-job figures exceed the stated eighty-job capacity. They show why those scenarios fail under the current setup; they are not attainable production forecasts.

At $1,100, sixty jobs would cover the assumed fixed operating costs, assuming the same $600 delivery cost and $250 acquisition cost per job, and sufficient demand at that price.

That doesn't prove sixty customers will buy at $1,100.

It establishes a condition worth testing.

Changing the price can also change how many customers are willing to buy.

A higher price may improve the amount remaining from each sale while reducing the number of sales. A lower price may attract additional customers while leaving less money from each transaction.

Whether either decision improves the business depends on how demand responds, what the additional sales cost to deliver, and how much capacity the company actually has.

You cannot establish the better price by looking at the contribution from one transaction alone.

The discount is not automatically stupid. The price increase is not automatically smart.

The decision is incomplete until you connect price, volume, cost, and capacity.

Adding a Markup Doesn't Finish the Thinking.

Cost-plus pricing begins with an estimated cost and adds a markup to produce a selling price.

That can be a useful calculation.

But the calculation does not establish that customers will accept the price, that the cost estimate includes everything relevant, or that the resulting sales volume will support the business.

A formula can produce a number.

It cannot establish the market for that number.

And before you celebrate your markup, make sure you know what you calculated.

Suppose an item costs $200 on your chosen cost basis.

You add twenty-five percent and sell it for $250.

The difference is $50.

That is a twenty-five-percent markup on the $200 cost. It is twenty percent of the $250 selling price.

Different denominator. Different percentage.

And neither number establishes net profit if the cost basis excludes acquisition, overhead, returns, or other expenses the business still has to pay.

“We add twenty-five percent” is a description of your arithmetic.

It is not yet an explanation of your business.

Your Costs Don't Obligate the Customer.

Let's go the other direction.

You calculate the economics carefully and conclude that you need to charge $2,000 at the volume you can reasonably deliver.

But the customers you can reach will only pay $1,200 for the offer as they understand it.

Your spreadsheet does not obligate the market to make up the difference.

Maybe the offering needs to change. Maybe you are including work the customer doesn't value. Maybe your process is unnecessarily expensive. Maybe a different customer has a more valuable use for the same capability.

Maybe the customer doesn't understand what is different about your work, and better communication would help.

Or maybe the business cannot economically deliver this offer to this market.

You have to investigate which one is true.

You don't get to solve it by declaring yourself premium.

A more expensive logo, a dramatic sales page, and the phrase “white-glove service” don't automatically establish why the buyer should pay more.

What changes for the customer?

What problem is solved? What work is included? What risk is reduced? What evidence supports the promise?

“Charge What You're Worth” Is Not a Pricing Model.

Your personal worth is not the thing on the invoice.

The customer is buying an offer.

Expertise can absolutely support a higher price. A capable operator might solve in an afternoon what an inexperienced person would struggle with for weeks.

You don't have to make the work slow to make it valuable.

But the price still needs a relationship to what the customer receives, the alternatives available, and the business required to provide it.

“I've been doing this for twenty years” can help establish credibility.

What does that experience do for the person paying you?

Explain that.

And don't swing to the other extreme by pricing your own labor at zero. If the model works only because you contribute endless unpaid evenings, say that honestly. Consider what it would cost to sustain or replace that work rather than treating your time as an unlimited free input.

You may choose to invest your time while building something.

Know what you're investing and what would make that investment worthwhile.

What, Exactly, Does the Price Include?

A price without a scope is an unfinished promise.

Return to the hypothetical $1,000 service with $150 remaining after delivery and acquisition.

Now the customer asks for another version. Another meeting. Another revision. An extra visit. Something that was never clearly included or excluded.

Suppose the extra work adds $200 in delivery cost and you collect nothing more.

Your $150 contribution becomes negative $50 before fixed overhead.

The advertised price didn't change.

The work did.

That's why the offer includes more than the number: deliverables, quantity, turnaround, revisions, support, responsibilities, and payment terms all affect the arrangement you are pricing.

You don't need to nickel-and-dime people or surprise them with charges after the fact. You need to make a promise both sides understand and price the resources required to keep it.

“Unlimited” is still limited by somebody's time and money.

Usually yours.

Sometimes a Discount Makes Economic Sense.

A useful pricing analysis distinguishes a short-term opportunity from the normal structure that must sustain the company.

If capacity would otherwise go unused, additional work may improve the result when its additional revenue exceeds the costs and opportunities sacrificed to take it.

If that same discounted work displaces work that would have paid more, or forces overtime and extra spending, the calculation changes. Special-order analysis explicitly considers available capacity and the additional costs of accepting the work. [4]

You cannot decide which situation applies by looking only at the discount percentage.

Ask whether the sale is genuinely additional, what it costs to fulfill, and what other work it prevents.

Nor does every product have to carry an identical share of overhead or make money on the customer's first purchase.

A business may deliberately subsidize an introductory offer because later purchases or other parts of the relationship create enough additional contribution.

But repeat business is a hypothesis until there is evidence behind it.

Show the repeat rate, the timing, the cost to serve those purchases, and the cash needed to reach them. Don't use an imaginary lifetime value to excuse a loss you haven't investigated.

There is a difference between a funded acquisition strategy and hoping the customer eventually makes you whole.

A Profitable Sale Can Still Arrive Too Late to Pay Payroll.

You deliver the work today.

The customer pays later.

Employees, suppliers, software providers, and the landlord may need their money before that payment arrives.

Even when the overall transaction is profitable, the business needs a way to fund the gap. Cash budgeting separates expected collections from payments and identifies when financing may be required. [5]

The price and the payment terms need to be considered together.

Deposits, milestones, or shorter payment terms may reduce the funding requirement when appropriate to the work and permitted by the applicable rules. They do not turn a loss-making job into a profitable one.

Borrowing may bridge a timing gap. It also has a cost and creates an obligation.

Revenue, contribution, operating profit, and available cash answer different questions.

A sales report is not a bank balance.

The Price Also Determines How Much Room You Have to Be Wrong.

At $150 remaining per job, a $150 unplanned cost consumes the entire contribution from that job.

A refund, mistake, extra trip, or replacement can matter far more than it looks on a revenue report.

That doesn't justify adding arbitrary padding and assuming the market will accept it. It means predictable rework and support should be reflected in realistic cost estimates, and uncertainty should be tested rather than ignored.

For a specific pricing decision, distinguish between expenses that will actually change and expenses the company will incur regardless of whether it accepts the work.

Also consider the opportunity cost of using limited capacity.

If a discounted job occupies time that could have been used for a more profitable job, the company has given up something of value.

But assigning part of the existing office rent or management salary to a job does not mean those expenses disappear when the job is rejected.

The decision needs to reflect the costs and alternatives that are actually affected.

Over time, however, the business still needs enough total contribution to support its continuing commitments and the return required to keep operating.

A sensible price for one spare slot is not automatically a sustainable price for the whole company.

Here Is What Would Change My Mind.

Show me that your price attracts enough of the right business, at a deliverable volume, with enough contribution and cash to support the operation.

If a lower price brings enough genuinely additional demand without overwhelming capacity or destroying contribution, it may be the better decision.

If a higher price loses some customers but improves the overall result, a lower sales count is not automatically a failure.

If an introductory loss is supported by credible repeat-purchase economics and affordable funding, evaluate the complete relationship.

The test is not whether everybody accepts your quote.

It is what happens to the business when enough people accept it.

Compare actual realized prices after discounts and refunds. Track delivery hours, material costs, acquisition spending, rework, payment timing, and the capacity each type of job consumes. Compare the customer's actual scope, not just the label on the package.

When testing a price change, account for differences in customer mix, season, offer, and acquisition channel. A before-and-after sales change alone doesn't establish that price caused it.

You don't need perfect information to make a decision. You need explicit assumptions, evidence that can challenge them, and a point at which you reconsider.

If the numbers contradict your favorite price, change the price, the offer, the process, or the model.

Don't ask the report to tell a nicer story.

Your Prices Are Based on What?

Not just the competitor.

Not just your costs.

Not just what somebody agreed to pay once.

What does the customer purchase?

What does it cost to deliver?

What does it cost to acquire the customer?

How much can you actually fulfill?

When does the money arrive?

What remains after the business fulfills its obligations?

And does the market support the price required?

A good price is not simply one that produces a sale. It is one that supports a viable transaction within a viable business.

If you cannot explain that relationship, what the fuck is your price based on?

Continue Reading on anuhlest

• How Much Should I Spend on Marketing? That Depends on What the Fuck the Next Customer Is Worth. — why marketing budgets depend on contribution, capacity, and incremental acquisition cost.
• Your Business Made a Million Dollars. Where the Fuck Is It? — why revenue, profit, and available cash answer different questions.
• You Got the Customer. Now Keep Them. — why first-sale economics and repeat-purchase assumptions must be separated.
• Everybody Has Marketing Advice. Nobody Wants to Explain the Fucking Business. — why the offer and operating model come before the marketing channel.