How to Generate your Selling Price
The selling prices of your franchise's goods or services is one of the most important decisions you have to make. After all, you need to make a profit to stay in business, but setting the values for the goods or services your franchise is marketing can often be a source of frustration. This can be easily avoided once you understand the relationship between the values of your goods or services, their costs, the perceived values in the marketplace and how customers view your business in the context of the goods and/or services you are selling.
Cost and priceAs you are buying a ready-made business many of the cost calculations may have already been performed for you by the franchisor. The sale price of your franchise's goods or services may also be fixed (to a point) leaving you little room for negotiation. But this doesn’t mean you are powerless. Often, it is possible via hard negotiation with suppliers to reduce your costs, or gain good credit terms thus increasing your overall profit margin without increasing your sale price.
Also, the value that your franchise has embedded in can be a difficult commodity to quantify. Consumers often buy goods from one supplier even though they know they can obtain the same item cheaper from elsewhere. Why? Because of the added values that the supplier offers them. This could be better customer service, a great returns policy, additional benefits with future purchases, or favourable credit terms.
Yes, the selling price you charge has a fixed cost component, but the other intangible aspects of setting a selling price can be where your franchise business can charge more and therefore, increase the overall profit margin. Your selling price, therefore, has these key components:
This is the actual cost of producing the goods or services in your franchise business. This can be materials, or other costs such as paying third parties to provide a service on your behalf.
This is the perceived value of your franchise's goods or services in the eye of your customers. What they think a reasonable price for goods or services is an important factor when determining selling price.
If your selling price is too high, this can create a negative image in your customers minds. A low selling price can also make a customer think they are not buying a valuable product or service. Also watch out when you reduce prices in sales. Don’t let this adversely affect your usual selling prices.
Market research and selling priceArriving at a selling price will mean you have to intimately understand the market that your franchise will operate within. The franchisor will have already done some of the research you can draw upon to arrive at values for your goods and services and therefore a sensible selling price, but taking your time to understand the customers you will be selling to may well enable you to increase your selling price, via higher perceived values.
Be aware, though, that setting a low selling price that you later have to increase could damage your market. This is especially true if your franchise business is adopting the cost plus (see below) pricing strategy. Cutting prices is much easier than raising them!
Pricing strategyYou have basically two choices when you look at pricing your franchise's products. You will be guided by the franchise handbook your franchisor will give you, but generally you will price your products or services based on two pricing strategies:
Value based pricing
The sales that your franchise makes to customers can depend on the benefits that your goods or services offer them. These benefits are at the heart of value-based pricing. The values that are important to your customers can greatly influence their desire to buy, and therefore, what price they are willing to pay. This is where the ‘added value’ your franchise can bring to the market can be charged for via a higher selling price.
Cost plus pricing
The profile of the market your franchise business will be selling to could be driven by price and nothing else. In this market customers are very price sensitive. They are also usually looking for credit from the businesses they buy from. Be careful when adopting this pricing model as you can easily get into a price cutting war with competitors.
The goods and/or services the franchise business you want to buy sells will guide you on how to best generate your selling prices. Look closely at the profile of the customers that will make up the vast majority of your new franchise businesses customer base. How they perceive prices will determine which pricing model you use, and ultimately, therefore, what you charge.