From the top · 28 October 2015

James Caan’s seven-day startup guide: Day three – Playing the numbers game

Getting the price wrong can mean big trouble for a young business
Getting the price wrong can mean big trouble for a young business

Lots of entrepreneurs I meet come across their first real hurdle during the number-crunching days. It’s often assumed that as an entrepreneur, you must know all about marketing, finance, strategy, operations and every other function needed to run a successful business. Of course, that isn’t true which is why starting a business can be so difficult.

Playing the numbers game is one of the most difficult parts to crack because it’s one of the most important and most complex. It’s not just a matter of plonking a price tag on your service or product – there are many aspects you need to consider before you make that final decision. The questions you need to be asking yourself differ according to what you’re selling.

If you are selling a service, then your pricing needs to reflect your time. Let me give you an example; services like recruitment, an estate agency and accountancy all take a formulaic approach to pricing. An estate agent will charge a fixed percentage on the price of the property it is selling, a recruiter will charge a percentage from the first year salary of a successful candidate and an accountant will charge a specific fee per hour. Time is money, and you need to factor this in when establishing your finances.

On the other hand, if you’re selling a product then there are different facets to take into consideration. The most important thing to focus on is how you’re going to sell your product.

If you’re going to retail the product yourself through an outlet or directly online then you need to think carefully about manufacturing and posting costs, as well as your potential retail price. However, if you’re selling to a distributor who then sells on to a retailer, you need to ask yourself if there is enough margin there for you to make a profit. My first column of this series explained that, at the end of the day, a business needs to run and the only way that’s going to happen is if it’s profitable.

To do this, you need to strike a deal that works for both of you. For example, if a distributor is buying from you at £10, he’s most likely going to sell it for £30 which means you need to have your product made for at least £7.50 in order to make a 25 per cent margin for yourself. Then you need to consider volume – how much of your product is the distributor going to buy? The more they buy, the cheaper the price.

Like all other things in business, your price needs to reflect your market and it needs to be competitive. A typical mistake I always came across on Dragons’ Den was entrepreneurs ignoring the importance of “USP” and an established brand.

ALWAYS compare like for like. If you’re starting a new clothing line, don’t compare yourself with Michael Kors because you don’t have that established brand yet. There’s no point telling me “look James, Michael Kors sell exactly the same product for three times the price I can offer – it’s bound to be a success” because consumers are loyal to brands they love. Even if customers can get the same product cheaper, they’ll still consider branding as part of the decision. Nine times out of ten, I bet they want the branded one.

The overarching theme for both of these structures is ensuring you’ve arrived at a formula which is both competitive in the market and still enables you to make a profit.

Getting your numbers right will require thorough research and a lot of your time. But being thorough and making the effort will mean you’re one step closer to building a viable, profitable business and becoming the entrepreneur you’ve always dreamt of being.

Up next: Step four in your startup journey is about personnel and my next column (published on 4 November) will focus on building the right team to enable business growth.

And remember, if you have any specific questions for me then please don’t hesitate to get in contact with the Business Advice editorial team.

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ABOUT THE EXPERT

Renowned investor and business builder James Caan is currently the founder and CEO of Hamilton Bradshaw, a firm specialising in buyouts, venture capital, turnarounds and real estate investments. Prior to that, he was one of the longest-running investors on BBC television show Dragons’ Den, founded and exited recruitment business Alexander Mann and was the chairman of the government’s Start Up Loans initiative. His efforts were recognised when he was awarded a CBE for services to entrepreneurship and charitable services through the James Caan Foundation.

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