Setting an appropriate price for your product or service is both one of the hardest and most important aspects of running a business. Most entrepreneurs don’t have any idea what they should be charging. As strange as it may sound, they are probably more likely to undercharge for their services. Apparently, they are either passive negotiators or don’t know how much they are really worth.
There are a number of pricing strategies that I learned in my MBA program, but I found them too archaic to be useful. Instead, I think the following feedback will serve most entrepreneurs better.
Price is something you need to address from the very beginning. There are a few reasons why selling too low will end up costing you in the long run:
Obviously, you can make less in sales (although not always, as you may sell in larger volume)
You operate on a minimal profit margin and incremental expense increases can ruin you
You establish yourself as inferior company with an inferior product
Throughout the recession, many companies have tried to compete by cutting their prices. As their competitors responded, they cut them further. Their profit strategy turned into a survival strategy, which eventually turned into their Chapter 7 bankruptcy application.
Following competitors’ movements is one of the biggest ways to lose your own identity. If you are charging more than your competitors, you can simply convince your customers that you are worth more. Isn’t that what you want to be doing anyways? Convincing your customers that you have a better product but are selling it for less is likely to give them mixed messages.
Pricing strategies should never be based on competitors. They are supposed to be based on your customers and what they are willing to pay. Granted, your competitors fit into the equation, but only because they influence your customers. You simply need to put in a little more effort to influence them as well.
You also need to think about how you engage and negotiate with your clients. This involves how you structure your sales program and negotiate with your clients. If all sales go through a form on your website and your customers are not purchasing anything, the problem may not your price. You may need to change your sales process so that your customers can engage with you and you can justify your prices. If necessary, you can leave room for negotiation in case the price really doesn’t work.
One of the biggest mistakes I have made is letting customers drag me into the “I’m thinking of a number game.” They ask me to propose a quote and I have often wondered what they were thinking of. I didn’t realize that I was undercharging myself until one client said that she usually paid a little less than what I suggested. This was not a problem, because the price she proposed was still fair.
Then I started thinking about all of the clients who never complained. They probably had a number in their head for the very beginning and were waiting for me to bid lower. It was a win-win for them. If I bid too high, they could simply assert their terms. On the other hand, if I bid too low my modesty was a few more dollars in their bank account.
After this epiphany, I asked them up front what they were willing to pay. If I thought a price was unfair, I would state my mind and what I felt my services were worth. I would not be offended if they didn’t agree. Rather, I would politely decline and say I hoped there were no hard feelings. Negotiating is really a game of poker. You need to be careful when you show your hand.
Choosing the wrong pricing strategy can ruin your business. It pays to be one of the few entrepreneurs who can get it right.