Page 196 - Budgeting for Managers

Small Business Money Management
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The Price of Live Fish
Many years ago, my father and I went on vacation.We went
skin diving with a tour guide who made his living collecting
rare fish and sea animals and selling them to people who had saltwater
aquariums. He told us that business was always slow during the summer.
My father, who is an economist, pointed out that during the summer,
people like to go to the shore themselves and do their own collecting.
The problem wasn’t that fewer people were putting things in their
aquariums during the summer; it was that people were collecting things
for themselves. Once the sea collector understood where his competi-
tion was, he could adjust his business. For example, he could offer to
take his customers to go skin diving and do their own collecting.
lish them. Instead, we do custom work and we prepare a propos-
al for each job. The price we propose must be low enough that
the customer will consider
hiring us and high enough
Flexible Pricing
that we will make money if
It would be a mistake to set
we take the job. In addition,
a price and then print thou-
if our proposal is a com-
sands of price tags and expect the
petitive bid, then our price price not to change for a year.When
must compete with the you advertise, you can advertise a
prices of bids from the price as being “for a limited time only.”
other vendors that the cus- If you sell more than you produce,
tomer is considering. raise your price. If you don’t sell
enough, offer a sale and then, eventu-
Table 11-1 illustrates
ally, lower your price. Ultimately, the
one way of thinking
only way to learn the best price is to
through a bid. In this case,
try a price and see what happens.You
my company was asked to know you’ve got the right price when
act as a body shop, pro- you sell what you’ve got, but you
viding technical staff to couldn’t sell any more.
complete computer instal-
lations. Our customer would charge their customers either
$125 or $150, depending on the contract with the customer.
They would retain 35% and pass the rest on to my company.
My company would retain 40% of what it received and pass the
rest on to the workers. We prepared Table 11-1 to illustrate
whether this was worth doing.