Empower Your Business

Accounting is Just the Beginning

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Trades, Service and Professionals – Setting Your Charge-out Rates

High, low or somewhere in the middle?  Where to pitch realistic charge-out rates is a common question facing trades, service and professional businesses.

In fact it’s probably one of the most difficult areas of business. You have to be careful not to underprice as this will reduce profits, but at the same time, overpricing could turn customers away.

Setting charge out rates is just as important as marketing and delivering a fantastic service.  You can do these two things excellently and then undo the lot by setting charge out rates too low or too high. This means pricing is a complex strategy that should be carefully undertaken and reviewed.

Your Value Proposition
Firstly, you need to decide where your products or services sit in terms of your value proposition. Simply put, you have four main choices, low price low value, low price high value, high price low value or high price high value, as can be seen on the graph below:

Adding Value graph

Some examples will help. Low price low value – $2 Dollar Shop?  High price low value – some firms of accountants who survive on their brand name alone!  High price high value – luxury cars?  Low price high value – those trying to buy market share as you wouldn’t normally survive very long!

To read more about deciding upon your value proposition and how this affects your prices, click here.

Know Your Overheads
Secondly, you must know what it costs you to operate your business before you start to set a charge-out rate. In particular, you’ll need to look at:

  • Annual budget
  • Working capital tied up in stock, work in progress and debtors
  • Cash-flow forecast.

Customers Don’t Choose on Price Alone
Once you’ve worked out your bottom line, don’t simply jump in with the lowest rate.  There is no doubt that charge-out rates are of concern to customers but contrary to what you might think, they are not the only thing customers take into account when choosing a supplier, far from it.  In fact astute customers tend to choose businesses primarily for reliability and honesty.  Other factors that enter into the buying decision include:

  • Quality
  • Technical and back-up services
  • Reputation
  • Turnaround times
  • Promptness
  • Friendly and caring
  • Offering a great service
  • Punctuality and tidiness for tradespeople
  • Location
  • Refund policy
  • Guarantees

It would help to do some research on what goes into your customers’ buying decisions before setting your rates.  For example, looking at what your competitors do and how they charge could be one way of determining what customers in your area are looking for.

Do your competitors offer round-the-clock and/or prompt service, do they give guarantees or are they renowned for quality work?  If they are flat-out busy yet charge a high rate, chances are customers care more about the service than the money they have to spend.

In the market place you’ll find many businesses charging 5%, 10% and 20% higher than their competitors, yet still run very profitable businesses. In fact these businesses are often the most successful because they have achieved excellence in those areas listed above.

Setting Prices Too Low
Clearly you need to base your pricing strategy on much more than price alone. So what does happen if you set charge-out rates at the lowest end of the market in the hope of attracting customers?

Some people advocate this is the only way to build market share in a competitive market. To increase profit margins you simply increase prices later once you’ve reached the desired market penetration. This strategy, however, comes with potential risks.

Once you’ve introduced a product or service at a low price, it creates a low price/value relationship in the customer’s mind, and once there it’s very difficult to remove. When you want to increase the price, you might have to spend a lot of money on marketing and promotion to change that image.

Understanding a customer’s perception on pricing is one of the key elements in developing pricing strategies for service and professional businesses. Most importantly, the lowest price is not necessarily the best price. Customers ultimately look for the best service at a realistic price.

Next Steps
If you need a hand with your pricing contact Nick on nick@abac.co.nz or 0800 ASK NICK who not only has many years of experience in this area but a very useful tool that can work out your charge-rates just by entering your overheads, budgeted profit and labour costs etc.

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7 ways you can use your annual financials to improve your business

The availability of your annual financials is a wonderful opportunity to review your business performance. You can discover how to improve your business as well as refresh your enthusiasm and drive in the business.

Click here to read seven ways you can use your annual financials to improve your business.

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How to succeed with cash flow forecasts

Preparing an annual cash flow forecast can tell you a lot about your business.

It can warn you with plenty of time to spare that you’re not going to have enough cash to survive the next year without getting additional working capital — which is vitally important to know.

Or it could be the wake-up call you need to make some changes in your business. You might need to make a tweak or two, like increasing prices or shedding ineffective staff, or you could discover something more serious, such as you’re in a twilight business and it’s time to move on.

Read more on how to prepare and read your forecast here.

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8 Vital Things You Need To Know about Your Business – Each and Every Month

Just how much do you know about your business? No, not about what you sell, or how you make or deliver your products and services, I mean the really important things that determine whether you’re going to make it through to retirement or maybe even successfully selling your business.

These are my top eight favourite things each and every one of us business owners should know about our businesses: Read More

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KiwiSaver Questions in New Zealand Answered

Watch this video on KiwiSaver as we answer some of your more common questions:

Why is it important to make my contributions by 30 June each year?

Should I have a KiwiSaver account if I have a mortgage to pay?

What if I don’t start my KiwiSaver until I am older?

KiwiSaver Accountants Hastings

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Retirement – Relaxing Golden Years or a Frightening Prospect?

Are you looking forward too or dreading retirement? Back in the heady days of the booming eighties it was not untypical to hear people talking about retiring in their fifties. What with the global recession, easy credit and uncertainty in the property and share markets it’s more a case of whether we can ever retire, especially with us all living longer these days. So how might you survive in retirement? Read More

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7 tips for keeping your accounting organised

When it comes to running your own business, keeping your accounting in-order must be an achievable goal. That said, there are times where a little lack of discipline can cause some headaches down the track. Rather than getting yourself in a bind later, let’s have a look at some simple steps you can take to help keep your accounting organised.

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Part 2 – Four Vital Things You Need To Know about Your Business

Last week I shared four of my eight vital things you need to know about business each and every month, here are the final four:

Rolling 12 Months Turnover. It’s no good keeping an eye on your monthly or weekly sales and comparing these with last year or the year before, nor your sales for the year to date, you need to monitor your sales over the last 12 months (or 52 weeks if you prefer) and compare with the previous year. Not only does this prevent you getting depressed in your down season when it’s easy to forget just how poor trade can be, but in addition, it irons out the seasonal kinks in your turnover and provides you with the real picture of how your business is tracking.

Your Sales Pipeline or the Number of Prospective Customers Thinking About Becoming Customers. No matter how busy you are, you still need to be thinking about next month’s, the next quarter’s or next year’s business and where it’s going to come from. Now some of my clients just get one-off jobs and it’s vital if you’re like them to think at least six months ahead about how you’re going to keep your sales pipeline topped-up. To find out more about your sales pipeline click here.

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How to become a millionaire retiree

How would you like to have a $1m nest-egg on retirement?  Think it’s not possible?  Well you can, and you can still spend 80% of your income!

Take a look at the table below and start saving now before it’s too late!

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The 10 Commandments of Staff and Recruitment

Many small business owners struggle with employing staff, even to the point where they remain one-man bands to avoid taking on any employees. This, of course, means that they miss out on the opportunity to build wealth by selling their business, which surely must be one of the great things about going into business!

Getting things right with staff is just like other areas of business; it’s about planning in advance, being organised, getting the paperwork right and being consistent and fair. Here are some pointers:

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