One of the most challenging tasks for a startup owner is to come up with an effective competitive pricing strategy. While you want your products or services to be accessible to your target market, you also need to ensure you are not leaving money on the table by underpricing yourself and your team. After all, your net profit will greatly depend on the price you set for your products and services.
If you set your prices too high, you’ll be driving away customers, whereas when you set them too low, you will not make any profit.
Moreover, setting low prices may have a negative effect – and that is enticing difficult customers.
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Knowing Your Worth
It pays to know that pricing is not just math but also psychology. There are a lot of proven formulas you could study and apply to set your prices, but it also boils down to knowing your real value and having the confidence to ask for what your work is really worth.
Are You Underpriced?
The key here is to realize that pricing is an iterative process. There is a huge chance that you won’t get the price right at first. However, the sooner you find out that your price is deficient, the earlier you can go over it and determine the right pricing.
Here are six indicators that you are pricing your products too low:
1). Your Customers Tell You:
If you give someone the price of your offered products, how do they respond? Do they instantly negotiate? Or do they say “That is a good value,” “Great prices,” or “You can’t go wrong at that price”?
Carefully listen to what your customers say about your prices. When they say that it is of good value or cheap and don’t even try to negotiate, then you might be charging your products too low as opposed to your competitors.
2). You Are Not Making Any Money:
True pricing must begin at the wholesale price and add up to the retail price. However, if you have never thought about it that way, consider cutting your current price in half, then add up the labour, materials, and the expenses for making that product. If the sum is higher than your wholesale price, then you must raise those values.
Another way of determining if you are making money is to log all the hours you’re working, including planning, selling and organizing. Divide your net profit by the number of hours you’ve worked. This will provide you with an idea of your effective hourly rate. If it is less than the minimum wage in your area, then you’re pricing your products too low.
3). You Are Giving Discounts To Make Sales:
If you’re just starting, sales are everything. Without it, your business will definitely fail. So chances are you’ll be cutting prices just to make sales.
However, you can also generate more sales if you increase your prices.
Why? Well, because in people’s minds, the price is directly related to value. Most people think that when the cost of a product high, so is its quality and value.
In a row of stalls selling vegetables, the stall that sells vegetables at a lower price won’t necessarily make more sales than the other traders. Oftentimes, customers will wonder why those vegetables are cheap. On the contrary, when people are confronted with an expensive artwork or piece of design, they may say that this product is good.
As such, you need to set your prices based on how much your target customers are willing to pay. Again, customers buy because you deliver something valuable, not only because it’s cheap.
4. You’re Not Generating Enough Income To Grow:
Your startup business may now be well-established because you have a steady stream of income and inquiries. You might also find yourself too busy because more and more customers want your products and services which triggers you to hire extra staff.
However, when you try to recruit new employees, you discover that you can’t afford to do so. This indicates that you have been pricing your offerings too low and you don’t have enough money to get even just one staff.
Of course, you can manage to do all these tasks, but you’ll soon get tired and exhausted. So before you burn out, you have to take immediate action. Hire an expert to look at your competitors, your market position, and your pricing.
5. You Attract Plenty Of Cheap Customers:
Lower prices have a tendency to attract low-quality customers. Low-ball prices encourage customers to try negotiating further. So if you are dealing with a lot of stingy customers, you need to increase your fees.
Pros recommend experimenting for a while. When cheap customers suddenly go away, you will know that your pricing is now within the range of what you should be charging.
It is great for customers to come in large numbers only if they are paying you what your offerings are worth.
When your organisation is just scoring clients with very low pricing, your motivation, health, and business will soon pay the price.
6. You Feel Like You Are On A Treadmill:
It does not matter how many service calls you make, how hard you work, or how many products you are selling. Your accountant will not be happy and your business will scrape by.
If your current pricing is too low, all the world’s exertion will not cover the ever-increasing costs. In turn, your business won’t gain profits. Aside from that, you will end up irritable, stressed and exhausted because all your efforts are worthless.
It is not easy to tell if your pricing is right. But to make your time and efforts worthy, you need to set the price even at the minimum level. Pricing too low is not good for your business – it can inhibit growth and eventually wear you down.
When you are just starting out, set your prices a bit higher than you think you must, fight the urge to please everybody, and target the high-end clientele first. Admittedly, this approach is tricky to carry out even for seasoned business owners.
Working with a personal business coach is also highly advised to ensure the success of your business.
How Exactly Do You Do This?
Organizational development coaching can help as it is key to uncovering and specifically identifying your business’ strengths and development areas. The coaching process can arm you with the tools to truly understand yourself and your business. It will also help you and your team become better leaders and negotiators. All those lead to gaining more insights about your market and having the confidence to ask and work for what you deserve.
And isn’t that essentially what smart pricing is all about?
About The Writer
This is a guest blog post submitted by Salma El-Shurafa. She is an experienced Executive Coach and founder of The Pathway Project. She is a Professional Certified Coach by the International Coaching Federation (ICF), a Certified Professional Co-Active Coach from The Coaches Training Institute (CTI) and a graduate of CTI’s Co-Active Leadership program.
Note: This article has been edited for style and substance.
What are your thoughts on these 6 signs you’re pricing your products too low? Let me know by leaving a comment below.
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