Part 7 of 7
So let’s get to part 7 — how to finalize your pricing strategy, tie all the part together, and be confident in setting your first price.
The time has come! It’s finally time to set your price.
Or maybe I should say, set your prices!
But let’s not get ahead of ourselves.
First we need to apply some reality to your price thinking.
Because reality is a tough equalizer, and often helps us keep things in perspective.
In Part 6 – Costs, Prices, and Profits, Oh my!, you learned that you needed to connect your costs and prices with how you make a profit using four (4) key pieces of data:
- #1 – What is the cost of your race?
- #2 – Do you know what it costs to run your business?
- #3 — How much do you need to make to keep your business open?
- #4 — How much revenue do you need to make to pay for everything?
That’s a lot of reality to put together.
Do you have any idea what the answers are to those four questions are?
No? No worries!
For the remainder of this lesson, we’ll use some of the assumptions we made about your race in Part 6, and add some new ones to help make everything understandable.
Starting with Question #1, we guessed that your race will cost you $3,000 to produce (Cost Per Race) and includes ALL your costs, with the only exclusion being payroll (i.e. staff salaries).
We’ll assume that your first year of racing will be based on a heavy use of volunteers.
In question #2, we decided that your salary, your business costs, and all your fixed costs for one year was $60,000 (without adjusting for taxes).
For question #3, we assumed that you would build 10 races a year.
We divided $60,000 (Overhead for one year) by 10 races, and arrived at an estimate of an overhead of $6,000 per race.
This was how much it cost you to run your company per race, if we only did 10 races a year ($60,000 / 10 = $6,000).
Then we added that Overhead Cost, to our Cost Per Race, we found that it would require us to make a total of $9,000 per race to Break-Even ($6,000 + $3,000 = $9,000).
$9,000 is the total amount you need to build each race, pay ourselves, and keep the business doors open.
With me so far?
If not, please go back to Part 6 to review our accounting assumptions in more detail.
If you’re still following along, then we now know that the answer to Question #4 is $90,000 per year ($30,000 + $60,000 = $90,000).
We need to earn $90,000 of revenue to make our race promotion business function for one year.
To review, are cost assumptions are:
- #1 – $30,000 for 10 races ($3,000 per race)
- #2 – $60,000 per year to run your business
- #3 — $9,000 total per race to keep your business open
- #4 — $90,000 per year in revenue to pay for everything
Wow! $90,000 does seem like a lot of money.
It does! How are we going to make that much?
Your costs do look endless and overwhelming.
However, you accrue these costs for a purpose: to build a product!
In this case, your product is your race.
Once your race is ready, you sell it, and hopefully make more money on it then you spent to build it.
Then you do it again, and again, and again.
But before you can make more money on a race then you spent on building it, you need to know what “more money” looks like.
To understanding this, we are not going to make some assumptions about the money we need to earn.
First, we use a special term for money earned called “revenue”.
Revenue is the gross or total amount of money we earn before we do anything to it (like account for expenses, taxes, and profits).
In Part 6, you learned how to find the mean price based on how you ranked your race’s value compared to your competitor’s value.
From that, we assumed that our mean price was going to be $40.00, with the minimum set at $30.00, and the maximum set at $50.00.
$40.00 became our price for one registration (price per ticket).
We then took the total Cost Per Race ($9,000) and divide it by our mean price ($40.00), we discovered that we needed 225 registered racers to pay us $40.00 each, if we were to just break-even.
To review, are revenue assumptions are:
- #1 – $40.00 per registration (price per ticket)
- #2 – $30.00 per registration (minimum)
- #3 — $50.00 per registration (maximum)
- #4 — 225 registrations per race to break-even
Okay, that was a lot of numbers to crunch just to outline our assumptions!
But these assumptions are a set of very important numbers you need to understand.
Because if you do not know these numbers, how will you know what your costs and revenues are race-to-race, or year-to-year?
How will you measure your success?
More importantly, how will you identify potential problems before it’s too late to react?
If you do not know these numbers, you will do more than just lose money.
You will go out of business.
This is why you need a Pricing Strategy.
You need a continuous process requires you to constantly reviewing in adjusting all the factors that goes into pricing.
In it’s simplest form, your pricing process should look like this:
#1 — We first come up with cost X.
This is where X is your cost of production, labor, insurance, permits, and everything else it took to make a race (e.g. your product) so that if you sold enough registrations, you would break even.
#2 — Then we come up with revenue Y.
This is where Y is your mean price, your minimum and maximum prices, the number of registrations you need to sell, and your break-even point.
#3 — Then figure out the difference Z.
This is where Z is your profit made after you collect all your revenue, pay all your costs, and account for all your business expenses.
Computing the value of Z becomes the financial reason for being in business.
A business that does not make money, will go out of business.
In our example, a race promoter that needs $9,000 per race to break-even, can not help but want to charge a higher price than $40.00.
But can you charge more than $40.00 per registration?
Or more importantly, should you?
To answer that, we need to understand how all the above information can guide our final pricing decisions.
Which means it’s time for one more set of pricing processes to add to our overall Pricing Strategy.
Before we can understand how to compute the value of Z, we need to ask ourselves these two questions:
- What are your Revenue Targets?
- How do you test your prices?
Let’s get into it!
Setting Your Revenue Targets
Your first decision you need to make before you can finalize your price, is your revenue targets.
Simply put, a revenue target is a dollar amount you want your business to make.
Some common revenue targets include:
- Break-Even Target
- Profit Margin Target
- Sales Targets
You already figured out your Break-Even Point.
Just so happens that your break-even point is your first revenue target.
Using our example assumptions, we know that our break-even revenue target is $90,000 per year.
We know that if we can make $90,000 in revenue, we have successfully reached our first revenue target.
Be aware that plenty of other events can impact this target.
Hopefully, during the year your revenue target was set, you do not have any of the following take place:
- None of your costs change
- All 10 races actually were held
- Each race reached its break-even registration number
- No one was hurt during one of your races
However, we all know that life happens when your making other plans.
That’s why we include profit as our second revenue target.
Why is it second?
Because your profit revenue target can change depending on how successful or unsuccessful your racing season for the year was.
First, let’s define what profit is as a revenue target.
You might see profit referred to as your “profit margin”.
All that means is that profit is often shown as a percentage, to make it easier for you to measure how much out of every dollar of sales you actually keep.
A 10% profit margin, would means you keep $0.10 of net income for each dollar of total revenue you earn.
Unfortunately, profit and profit margins is where most race promoters get stuck.
They have a hard time dealing with profit and how much profit they want to make.
In my article Race profits are evil, and other money myths, I go into the three myths that keep race promoters from rationally dealing with profit questions.
From the article, I state that if you’re “not making any money [promoting races], you’re not running a business, you’re enjoying a hobby”.
I also point out that “making a profit is just as important to your business, as the reason why you build races in the first place”.
In other words, if you don’t make any money, you will have to do one of three things:
- Cut your profit margin and net less revenue
- Cut some of your costs and downsize your races
- Accept reality, shut your doors, and go out of business
Few companies that fail to make a profit, stay in business very long.
Same goes for those that cut costs and downsize.
The point of your business should always be to grow, not shrink.
Lack of profit prevents you from growing, and keeps you from staying ahead of changing costs year-to-year.
Cuts in profits or costs can buy you some time.
But how long will it take before your cuts prevent you from paying your mortgage?
I’ll tell you how long: the first time you can’t make your mortgage on time!
This is why you should have a revenue target for how much profit you need your business to make — monthly and annually.
But how much profit is enough?
This is a tricky question, in that the answer you give DIRECTLY impacts your sales target, your final price, or both.
One way to answer this question is to consider what other industries set as their profit margins.
That data shows that certain business types make roughly the same profit margins to each other.
Take restaurants for instance. Restaurants on average make about a 4-percent profit margin, which is very low.
In contrast, software developers can make as much as 25- to 50-percent profit margins, which is very high.
Unfortunately, there is little data on the average profit margins of race promoters.
Why is there little data?
Race promoters don’t like to share that info.
This means it could be as low as 4-percent for some, to as high as 50-percent for others.
In my experience, I’ve seen it range between 5- and 20-percent.
That is by no means scientific — and varies greatly depending on the off-road discipline the race promoter is focusing on. For example, trail running has a higher profit margin per race than mountain bike racing.
For our purposes, we’ll assume our races have a simple profit margin of 10-percent.
10-percent seems like a very good place to start.
It is a respectable profit margin to work with, and an easy percentage to factor into your costs.
Going back to our example, a 10-percent profit margin would make your Cost Per Race go up by $900 to $9,900 per race ($9,000 x 0.10 = $900).
We assumed we needed 225 registered racers to break-even.
Now with a profit margin of 10-percent, we would need to sell 23 more registrations at $40.00 per registration (for a total of 248) to break-even.
We now need 248 racers to register!
That seems like I need a lot of racers.
Yes, it does!
Plus it puts a ton of pressure on your third revenue target: Sales.
Your sales revenue targets are the number of registrations you need to sell.
In the case of putting your profit margin into your costs, your sales target just became two numbers:
- 225 registrations sold to meet the Break-Even Target
- 248 registrations sold to meet the Profit Margin Target
If you sell 224 or less, you are losing money.
Selling between 226 and 248, means you make below or up to your 10-percent profit target.
Sell 249 or more, and you make extra revenue above your 10-percent profit target.
Your 10-percent profit margin target gives you a good set of numbers to focus your sale efforts on.
The idea is to help you understand how many more registrations you would have to sell before you earned a profit versus just breaking even.
See how adding your profit margin into your costs can impact your sales targets?
Now, what if switched it up and decided to add that 10-percent into your price?
That would then raise your mean price to $44.00 ($40.00 x 0.10 = $44.00).
If we divided $44.00 by our Cost Per Race ($9,900), it would keep your registered racers at 225.
A target of 225 registrations takes some of the pressure of your sales, but adds it to your customer.
This is often called, “passing expenses on to the consumer”.
It is much easier to make your customer pay for increases, then produce more sales.
In this example, you are essentially making your customer pay for adding your 10-percent profit margin into the equation.
Some might think this is bad business, but neither adding profit into your costs, nor adding it to your price, is right or wrong.
It is just another way to work your profit margin into your price.
You can either put pressure on your sales numbers to sell more registrations, or put the pressure on your customer to pay more per registration.
The only other options you have is to either cut your costs, or make less profit.
Strategies for another day.
Right now, understanding the cause and effect of your pricing choices is what you need to know.
As you start to find better ways to measure your prices, small changes to those numbers can cause significant impact to other parts of your business.
This is the benefit of having revenue targets.
Each change gives you a new target to work with.
However, only by measuring EVERYTHING can you know how realistic each new targets is.
Test Your Prices
In the example above, we decided to set the price at $40.00 per registration.
But is this the correct price?
It could be.
It also could not be.
You should always be testing new prices and offers to help you sell more of your registrations at a better price.
This means that you need to test your prices during each race.
Test my prices?
The concept works like this:
- #1 — Set a price for your first race
- #2 — Measure the volume of your registrations
- #3 — Measure the total gross profit dollars you generate
- #4 — Raise (or lower) the price for your next race
- #5 — Measure the volume of your registrations
- #6 — Measure the total gross profit dollars you generate
- #7 — Compare the volume and total gross profit dollars between the two races
- #8 — Repeat the process until you have enough data
This is the basis for a very simple price testing experiment.
The goal is to see what price works over another price.
The market will bear a range of prices — the prices they are willing to pay based on the perceived value you are offering.
You will know when your customer’s willingness to pay your prices has changed.
How will I know?
Your volume and total gross profit dollar measurements will tell you.
When numbers start to go down, they are a good indicator that something has changed.
Did you change your price?
Did you change something they thought was valuable about your race?
Only by testing and communicating with your customers are you going to know.
In previous lessons, I talked about all the means to which you can find out what your customers and competitors are telling you about your prices.
However, once you have decided on your first price, there are a few things you should continue to do throughout your process.
The first is listen to your customers.
You should be listening to them on a regular basis by getting feedback from your customers about your pricing.
You need to let them know that you care about what they think.
The next thing is to always keep an eye on your competitors.
You should consistently be monitoring their race prices, and see what changes they make to increase their value.
Monitoring your competitors can be a full-time job, but you can always hire someone (e.g. college students) to help you maintain this data.
The final thing you need to do have your testing plan in place.
Try to extend out your price planning out at least one year, and know when you plan on shifting prices.
Don’t surprise yourself, or your customers, when you make changes to your prices.
Find a natural break in your races to present your new prices, and do not make the increase so drastic that it surprises your customers from race to race.
Planned, subtle changes, combined with special deals or benefits can work well in testing your prices.
You owe it to yourself, and to your business, to be relentless in managing your race pricing.
Remember, it is how you set the price of your races that could mean the difference between the success — or failure — of your business.
And Now You Know!
Congratulations! You did it!
Hopefully you leaned a ton about setting your own prices, know what goes into your pricing decisions, and are confident in setting your prices for your next race!
I would like to thank you for signing up — and completing — my 7-part guide to race registration pricing. If you have any feedback on this course, or any suggestions to help make it better, please feel free to contact me at: firstname.lastname@example.org.
As a reward for completing this course, I am going to give you few very special gifts:
#1 – Free updates to this course for life!
As long as your email is still registered with Reckoneer.com, I will send you any updates to this course, even if I decide to charge for this course in the future. You will always have access to this for as long as you want it.
#2 – Bonus Content just for you!
For completing this 7-part course, I have begun developing Part 8 – Tools for setting the right price. This is my special gift for you. In just a few months, I plan on sending you a link to all the worksheets and dashboards that you can use to help you collect data, make decisions, and set good prices!
#3 – Join me on my new Merchants of Dirt podcast!
As an member of Reckoneer.com, I’m going to send you a link that gives you an exclusive chance to take part in programming a topic you want to hear me talk about on the Merchants of Dirt Podcast. This gives you a chance to provide feedback that will be used in deciding what direction Merchants of Dirt will take.
Thank you again for completing my course, and please check out my other courses on Reckoneer.com.
Kyle M. Bondo
Reckoneer | reckoneer.com