Have you ever bought something and thought that there’s something not right about the price? Maybe it seemed too cheap or you felt you were getting ripped off.
Pricing is tricky and a stressor for many business people.
Are we too high and scaring away customers? Our competitors are priced lower than us, should we drop our prices to meet them? Won’t our customers think that we’re expensive if our prices are different?
There are a number of pricing mistakes people make over the course of ownership of their business. I’ve made many of them over the years and hopefully have learned from some of these mistakes.
Pricing too low
Many small businesses set pricing policies that are too low. We believe every customer is looking for the lowest price and we try to meet these expectations. When we do, we’re unable to make a profit.
To overcome this, stop setting prices based solely on cost. Start thinking about the value we create for our customers and how much they will be willing to pay for this value. Then set your prices accordingly.
Not taking all your costs into account
Small business owners often set prices based on product costs but we don’t calculate all our expenses.
Have you calculated how much you’re spending on freight, marketing, offices overhead, labour, credit-card costs or anything else that contributes to getting that product to the customer?
When we take the time to figure out our exact costs, we can do a better job of recovering all those costs and setting prices that are realistic.
Holding prices the same for too long
This is a common mistake. We set a price for a product and then forget to change it if the market goes up or down
We need to understand that some markets are static while others can change quickly.
Having frequent regular price changes ensures that our customers understand that the market is fluid and we’re staying current.
Using the same margin on all products or services
I got caught on this mistake for a long time, until I realized I had some departments within my business that weren’t price sensitive.
Understanding which areas of our business have different values for different customers or segments of the market can change the way we price our products and receive our revenue.
Discounts, not value added
So often in business we decide we need to discount a product or service to drive sales. But cutting our prices is giving away the very profit we need to keep our business running and provide wages for our staff and ourselves.
A better way is to determine how you can add value. Is there something you have that you can throw in to ensure the sale but that doesn’t cost you much or won’t cut into your profit? If you’re a contractor, can you offer a second set of eyes to a project or have one of your team do something extra while they’re working on the site?
Failure to understand the difference between markup and margin
This is a rookie mistake I made when I started in business. I priced everything by a markup, but a 50 per cent margin is different than a 50 per cent markup. A $20 product with a 50 per cent markup is $30 while a 50 per cent margin would be $40.
This can be a big difference at the end of the year or if you decide you want to have a 30 per cent off sale. With the 50 per cent markup, you would end with $1 and with 50 per cent margin you would end up with $15.
Setting commissions for staff based on sales and not profit
Having a structure where your staff share in the profits of the company can be a great policy for some small businesses. But when we have commissions based strictly on sales, staff sometimes find ways to drive sales that don’t make any sense to our bottom line.
Having a reactionary pricing strategy
How many times have you decided you needed to change prices … just because. Without having a strategy for reviewing and pricing your products, you’re setting yourself up for misery.
Small business people often don’t think about pricing until it’s too late. Setting a pricing policy and regularly reviewing those prices and strategies allows you to price for profit and success.
Dave Fuller, MBA, is an award winning business coach and a partner in the firm Pivotleader Inc.