Nothing has a bigger impact on your business’s sales, health, and bottom line than your pricing. Set prices too high and your products or services won’t sell. However, according to analyst firm McKinsey, lowball prices are a far more common problem for businesses. In fact, they’ve found that upwards of 80-90 percent of all poorly chosen prices are too low.
It’s easy to understand why this phenomenon happens. Startups and small businesses have a habit of setting their prices low in order to attract customers. A brand new consultant might offer heavy discounts to win business and build a portfolio. Then, she never readjusts her prices back up to market rate. A web startup may keep a feature free for far too long, even though it’s clear that people are willing to pay for it.
These businesses face a similar future: they continue to win new customers, clients are happy, and their business is humming along busier than ever before. The problem is, it’s simply unsustainable. These entrepreneurs end up working as hard as they can just to stay afloat. In extreme cases, a business actually loses money with each new sale.
Are Your Prices Too Low?
Someone once told me, “If you set your prices once, they’re probably wrong.” That’s because with time, the cost of making a product and running your business typically increases. Maybe you’re a caterer and the price of milk has gone up over the past few years. A jewelry designer’s business is tied to the price of gold and silver. Costs for a consultant also rise, such as gas/travel, health insurance, contractors’ compensation, etc. All these rising costs need to be factored into your current pricing.
In addition, if your initial business strategy was to undercut the competition based on pricing alone, your prices are too low. Unless you are a multinational corporation selling commodity products, then cost cannot be the only weapon you have to attract new clients. It’s time to pick a new strategy and raise your prices.
Get Confident: Know Your Value
What’s at the root of low prices? For the new business owner, it typically boils down to a lack of confidence. You charge the least amount on the market for fear that clients won’t pay more. Then, once those low rates are established, you worry what will happen when you try to raise them. If you have fallen into this trap, then you know that this approach results in long hours, barely enough revenue to get by, and clients who don’t particularly value your services.
At the end of the day, running a business is about charging the money you deserve for the value you or your products bring to customers. Lowball prices send the message that your services, products, and talents are worth less than others on the market. Think about it: what type of quality do you expect from a pair of $20 shoes versus $100 shoes? How about a $50 bottle of wine versus a $10 one?