Many businesses struggle to set prices for their products / services.
Not just startups, but long-running businesses, particularly companies with high costs and lots of competition.
If you set prices too high you may push potential customers away. Set prices too low and you reduce (or eliminate!) your profit.
So, to help you avoid these traps, here are 3 of the most common mistakes that entrepreneurs make when setting their prices…
1. Undercutting the competition
Only a very small % of businesses should attempt to beat their competition on price. If you are Walmart, Lidl, McDonalds, or Primark then this is an appropriate strategy because you need a big market to address, and your target market includes many low income families.
But for most entrepreneurs, setting low prices destroys your profit (which directly impacts how much money you have to reinvest in your business and/or pay for shoes for your kids!).
Instead, you need to set prices that reflect the value you deliver. Sure, some people will decide to go with the ‘cheap’ alternative, but that’s fine. You want to work with the customers who believe ‘buy cheap, pay twice’. Instead, you can pass the discount shoppers to your competition who will have to figure out how to make a profit on razor-thin margins. Even better, customers who focus on price tend to be more painful to work with!
2. Ignoring your costs
To set a price that will make you a healthy profit margin (a portion of the money paid by customer that exceeds your costs), you need to identify and understand every cost in your business.
You’d be surprised how even ‘small costs’ like website hosting, online tools, and payment processing fees add up. Identify all of the costs associated with you doing business, and work out whether they are direct / variable costs (Where more sales = more costs e.g. Lemons for a lemonade stand) or fixed / overhead costs (Where more sales don’t result in significantly more costs e.g. Paying rent for the location of your lemonade stand) .
Don’t forget costs you plan to have in future, like staff salaries and sales commissions paid to salespeople (including replacing the work you do!) – these costs can obliterate your profits and lock you into working for your business, rather than on it.
3. Not understanding what customers value
Instead of reducing prices to create a better deal for the customer, ask yourself how you can add more value to your customer. This adds to the experience your customer has, which helps bring that customer back again and again – the key to a highly profitable business.
To do this, you need to do your research – uncover the value you REALLY offer your customers by speaking to them. Then set your price based on that value. Doing this puts you in a great position to defend your price, with a good list “why” your offering is worth its price vs. the competition.
So, avoid the pricing mistakes above, and instead build a profitable business.
If you’d like to learn exactly how to set prices that maximise your profit (step-by-step!), then take a look at the details of my “Premium Profit Pricing Masterclass”.
Once you master pricing, (an area in which even experienced entrepreneurs sometimes struggle), you’ll save countless time, money and headaches by knowing how to set the right price for new customers, and how to ensure you are maximising your profit.
You won’t get it right every single time, but over time, your extra profits will make the difference between you ‘struggling along’ or having financial freedom.