Are You Pricing Your Products Too Low For Your Small Business?

Whether you are freelancing or running an online business, your net profit is largely dependent on the prices you charge customers. Pricing is difficult to get right. If you set your prices too low, you won’t make any profit whereas if you set them too high, you’ll drive customers away. Because pricing is such an important topic for businesses, I’m going to devote several posts to exhaustively explore ways to help you find the pricing sweet spot within your niche. This particular post will help you detect whether you are setting your prices too low.

Especially when your business is just starting out, you won’t have many data points to work with and the lack of data will make setting prices especially hard. Because you may be forced to rely on guesswork or extrapolations from comparable products to determine price, chances are you’re not going to get it right the first time. Whereas it’s more difficult to determine if your prices are too high, it’s usually much easier to figure out if your prices are too low. Here are some indicators to look for if you’re shortchanging yourself on price.

You Feel Like You’re On A Hamster Wheel

Do you feel like you are working your butt off yet not seeing much profit? Are you moving a lot of product out the door with nothing to show for it? More often than not, you are shortchanging yourself on price. At the very basic level, pricing begins with determining how much profit you need to generate to maintain a proper wage. It’s actually quite astounding how many people go into business without even considering how much money they need to make in order to make it a worthwhile investment. Here’s an article I wrote on how to determine if your business is viable that you should definitely check out if you have the time.

Pricing starts with determining what revenue targets you want to hit based on the number of units you think you can sell. If you don’t believe that you can make your targets based on your current pricing, you either need to raise prices or find a new market to pursue altogether.

Your revenue targets are usually determined by your operating expenses. Make sure you account for each and every one of your expenses when trying to determine your potential profit. If your projected revenue minus costs yields a satisfactory profit, then your pricing is probably at least in the proper ball park. According to the Small Business Administration, the average small business makes between 10-15% profit before taxes. Taking the average profit of your industry into account, you can make a good guess as to what you need to charge to make an average wage.

My wife and I fell into the trap of pricing our products too low in the beginning. Our main problem was that we didn’t properly factor in all of the costs involved in selling our goods. For example, we didn’t account for the high percentage of defective product we would be receiving nor did we account for fuel and packaging expenses to deliver our goods to the end customer. While it was quite satisfying to see product moving out the doors, we basically worked our butts off for the first month and ended up just breaking even.

You Attract A Lot Of Cheap Customers

I don’t quite understand why this phenomenon occurs, but cheap prices always attract super cheap customers. You would think that already rock bottom prices would discourage a customer from haggling with you, but the opposite is true. Low-ball prices encourage customers to try and low ball you some more. It’s analogous to a situation that my friend was in recently when he tried to sell his house. He initially set the price on the low end so he could get a quick sale of his property. What ended up happening was that he attracted many bargain hunting home buyers. After receiving a bunch of low ball offers, he ultimately decided to pull his property off the market and upped his price to eliminate the riffraff.

If you find your business dealing with a high percentage of pain in the ass cheap customers, then chances are you need to raise your prices. You’ll have to experiment for a while, but once the cheap customers go away, you’ll know that your pricing is at least in the ballpark of what you should be charging.

Our phones used to ring off the hook back when we offered ridiculously low prices. We’d get a ton of calls from people who just wanted to haggle with us just for the sake of haggling. In some cases, I didn’t even think that these people ever had the intention of buying anything to begin with. It’s ironic, but raising prices stopped 90% of our customers from ever trying to negotiate on price again.

You Win All Of The Contracts You Bid On

This applies more to freelancers and contractors, but if you find yourself winning all of the contracts that you bid on, something is grossly wrong. Either you are majorly shortchanging yourself, or you are hyper efficient at what you do. Perhaps you have a significant competitive advantage, but in most cases, it means you are setting your prices too low.

My dad used to run a business that relied heavily on winning government contracts. No matter how hard he tried, he could never bid low enough to beat this one company who seemingly won every contract. My dad always assumed that this company was extremely successful and had some sort of major competitive advantage in the field. A few years later, the company filed for bankruptcy. No doubt, their low ball pricing tactics eventually caught up to them.

Conclusion

It’s not always easy to tell if your price is right, but you need to at least set the price at a minimum level to stay in business. It’s very easy to set your prices too low in the beginning when your business is just starting out. As a new business, you’ll often feel the need to price yourself lower to drum up initial business. This is all fine and good as long as you believe you are getting compensated enough for your efforts.

Further Reading

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7 thoughts on “Are You Pricing Your Products Too Low For Your Small Business?”

  1. Very interesting topic! I guess some (if not many) etailers will start to feel the pressure to lower their prices due to the current economy. I have read a lot of speculation about the coming holiday season thing online shopping will either up, down or stay the same.

    Your post brought up a lot of good points.

  2. An excellent topic, and an article! AS a person who fell into that trap myself, your points are all excellent and valid. Well done!

    I have to say, one of the reasons why people undervalue themselves stems from low self-esteem. That was certainly true for me, and I see it all the time among people who are considering starting their business for the first time. I’ve since gotten over it myself. ;-)

    Such people ought to talk to my business coach, Tom Volkar @ delightfulwork.com. He’ll beat that insecurity right out of you. ;-)

    ari

  3. Hi Ari,

    Interesting point. Come to think about it, we probably priced our products too low because of esteem issues in the beginning. We weren’t sure that our products were going to sell and we initially thought that being low on price was the answer. It wasn’t. Thanks for the comment!

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