A Question of Price

We help people with contracts that buy and sell their products and their businesses, license their products and their intellectual property, and lots of other things that lead to the question of “What do I charge?” Our first answer tends to be “That’s more of a business question than a legal question.” But that answer doesn’t fit our goal of “Be the reason it works.” And to completely bail on the question doesn’t accurately reflect that it is partially a legal question. So how do you price something? Here’s this lawyer’s (read: Not a valuation expert. Heck, I don’t even have a business degree, but I have been paying attention to a lot of deals for a lot of years.) advice.

First, know your product. What is it that your selling? Sometimes it isn’t obvious. Maybe it is an ego boost like prestige brands such as Louis Vuitton. That company is selling ego, not luggage. Or you are selling convenience, ease, or less stress, and not music like iTunes, which by charging a small amount for single songs took down both CDs and Napster. 

Second, know your target buyer. This really matters when you are selling your business. For example, are you selling to your employees or to a competitor? You are likely to get a lot more money from a company buying out its competition than your long-time employee taking on your legacy. What is it they want? What will they spend to get it? How much value do they see in your thing?

Third, know your costs and desired profit. Some start with costs and add desired profit. Others start with desired price and profit and figure out how to drive costs down to reach that. But without thinking about costs and profit, you are likely to have little to no profit. That’s bad. Oh, and remember that your labor is a cost. This is a big deal for really small companies. Your work is a cost, and you should build that into the price.

Fourth, know what is yours. Is there something that is uniquely yours, and because it is yours, it makes it harder for others to compete with you? Or put another way, how easily can others directly compete with you?  Perhaps it is a patent that prevents others from making your thingamajig. Perhaps it is a trademark that “everyone” knows and puts value in. Perhaps it is a secret process (or sauce) that gives you an advantage because you do things faster, easier, cheaper, or just plain better. That’s intellectual property (a/k/a finally my legal stuff!). Or maybe, you just spent a lot of time or money (or both) getting infrastructure that is not easy to get. A fancy factory, a downtown location that you have owned for 50 years, a massive customer database. All of those are barriers to entry. They make it hard for people to come into your space. 

Want to raise your price? Know what you are selling to whom. Then make sure they know that they can get what they want from you, and they can’t get it from others. They have to see the need or desire and the fulfillment. Want to get paid less than your worth? Let them think that you are a dime a dozen, and they can get it from 100 people or build it themselves for less than you are charging. 

It sounds easy. It isn’t always so. But the sooner and deeper you think about it, the more you can build your systems and your intellectual property portfolio, which in turn increases your value to your business and to your customers. And that can be captured in your price. 

Oh, and make sure your bookkeeper and accountant is on board so it is all captured in your books. And never underestimate the power of a good valuation expert.