Very few new business owners can admit to not having a wobble when they first have to decide upon their prices.
The biggest fear is that they will set prices too high and that customers will not buy. All a new business owner wants is a steady stream of sales so that they can feel secure in the knowledge that their product or service is wanted and that a bright and rosy future lies ahead for them. So for that reason, it seems, the new business owner often falls into the trap of pricing lower than competitors in order to lure customers in their direction.
This strategy can only bring short-lived success. Low prices tend to mean lower profit and lower profit means less earnings for the business owner. In order to achieve the financial security that every business owner craves, the business has to be robustly profitable. Where profit margins are low, you need to sell in higher quantities. Think about the pound shop model. They rely on very high volumes to achieve good profit margins.
You can only afford to erode your profit margins if you are confident you are going to sell an awful lot of your product or service.
Business owners also tie themselves up in knots over recouping the time spent working on a product or service. This is a tricky one. Think of the seamstress who spends hours and hours sewing hundreds of sequins on a bespoke wedding dress. Can the time spent hand sewing this garment ever be recouped through the price charged? Many of the entrepreneurs working in businesses where products are hand-crafted are adamant that its impossible to be paid for every hour that is invested in creating the product. ‘People just won’t pay’ is something I hear very often.
Pricing is heavily dependent upon a number of factors including demand, uniqueness, cost of materials or time, value delivered etc etc. It isn’t easy to get right, but here are the rules I have used to guide me through 18 successful and profitable years of my own business:
– Never undervalue yourself. Price to at least match your competition. If you aren’t producing an excellent product or service that can match or exceed that deliver by your competitors, then find something else to do!
– Focus on the value and benefits that your product or service gives to the customer. If you sell the thing for what it actually is you will always find it hard to price profitably. Being proud of what your product or service achieves and the difference it will make in your customers life is a better platform from which to set your price.
– Always, always work out what it costs you to make your product or deliver your service. Remember every single aspect of the costs from time invested to raw materials, to time spent in correspondence. Don’t give your time away for nothing, it is far more valuable than that; few business people that I meet feel they have enough hours in the day – time is one of the most valuable resources a business has. It doesn’t and shouldn’t come cheaply
– Be conscious in your pricing. If you choose not to include your time in the cost of making your product or service, do it in the knowledge that somehow, you have to compensate yourself for this somewhere else in your business model. By that I mean find a product or service that you can sell at a price that delivers a healthy profit margin, higher than you might usually achieve. An example of this was a lady I worked with who sold children’s dance costumes. Sometimes it was hard to charge for every hour invested in creating each costume. So instead this clever entrepreneur recognised that ancillary products she made from off-cuts and which took her minutes rather than hours or days to produce, could be sold at a price and in a volume that deliver her a pleasing profit.
– Stand your ground and hold your nerve. The number of times I have heard entrepreneurs say that they took a risk by raising their prices afraid that there would be negative impact, only to find that customers didn’t even bat an eyelid.
– If you are asked to discount your prices, always, always reduce the ‘offer’ if you can. If you continue to offer the exact same product or service but at a discounted price, then customers will always think that your product or service is over-priced. In my training business I will on occasion agree to lower my price to meet a client’s budget constraints, but I will always ‘reduce’ what I am able to deliver for that price. It might be that I offer to deliver a course with less bespoke content; I might ask the client to print the hand-out material; I could make the course shorter in length; if there is the potential to deliver the same workshop to multiple groups then I would be more prepared to lower the price per workshop than if it was a one-off (think pound shop model). The important thing is not to become a pushover. If it isn’t profitable for you to discount, then don’t.
– Flash sales, discounts and promotional offers are far better when they are planned and executed as part of your overall business strategy. Unless you can significantly boost your volume, it is your own profit earnings that get hit the most when you reduce your price. Think about BOGOFs. They work on the basis that the significantly reduced margins achieved through the sale of the item are more than compensated for by a dramatic ten or twenty fold increase in the amount of that product that is sold. Again it is the low margin high volume principle.
What are the strategies you use to ensure you achieve the price you deserve for the product or service you deliver?