It's Easy to Fall into the Low Pricing Trap.
You’re in business and passionate about what you do. Whether you are selling a product or a service and trying to decide on pricing, a conversation will run through your head. It may go something like this:
“How much shall I charge?” whispered voice.
A figure pops into mind.
A second voice responds smartly, “What, that much? You’ve got to be joking. Nobody’ll ever pay that much for something you’ve made/do.”
“You’re probably right,” the first voice backs down. “I tell you what, let’s go lower. That way, we’ll be sure to make sales”.
Your low pricing cycle has begun. As your prices are low, you attract sales, but you may be attracting sales from people who want things cheap. When they recommend you, their recommendation is accompanied by a reference to your prices “Try xxx, they’re really good … and really cheap”. Before long, you have a loyal following of customers who give you five-star reviews, but they are not paying enough. Should you raise prices to a more realistic level and risk losing customers, or stick with your prices and keep going, hoping that things will improve?
The truth is, pricing too low is bad for business. Pricing that is acceptable as a start-up may strangle your growth and eventually wear you down. Even well-established businesses can end up in a low pricing cycle.
What are The Signs that You are Pricing Too Low?
Sign No. 1 - People tell you
When you give someone your price, how do they respond? Do they immediately try to negotiate or is there a short silence followed by something like:
“Oh well at that price, you can’t go wrong”
“Gosh, that’s good value”
“Great prices, you’ll go far”
Sometimes the customer may tell you, usually after you have completed the work. “You really should charge more… ”
Tip – Listen carefully to customers’ response to your prices. If they say good value, cheap, wow and do not try to negotiate, you may be undercharging compared to the competition.
Sign No. 2 - You’re not making any money
You are very busy, you have orders and are always rushing about to see new customers. There is a lot of activity and people are commenting on how busy you are and laughingly say things like
“You’re doing well, you must be raking it in!”
Only you know the truth. When you tot up all those hours that you have put in – getting the work in, keeping the books, buying materials, going to business meetings, you realise that you are probably working for less than the minimum wage. Of course, if you are working 55 or 60 hours a week, you may still be making enough money to get by on, but you are certainly not making or likely to make an executive salary.
Tip – Keep a log of all the hours that you are working, including those thinking, planning, organising and selling, as well as doing. Divide your net profit by the total number of hours you have worked. This will give you an idea of your effective hourly rate. Would you apply for the job at that rate?
Sign No. 3 - You are not making enough money to grow
Your business is well established and you have a steady stream of enquiries. Customers want your products or services and you are busy. You desperately need to take on extra staff. The problem is, when you come to try and recruit people to do some or all of what you do, you find that you cannot afford to hire them. And if you do hire them, you are constantly worried about meeting the monthly wage bill. When holidays come around or somebody gets sick or falls pregnant, you wonder how you are ever going to manage. But you do manage, by putting in more hours yourself.
Meanwhile, you get more and more tired, your family keep a photo of you at home and holidays are a distant memory.
Tip – Immediate action is required, before you burn out. Consider getting professional help to look at your competitors, your pricing and your market position.
Sign No. 4 - You find yourself discounting to make sales
When you are starting up, sales are everything. Without sales, your business will fail and the pressure to make sales at almost any price is enormous. The temptation is to cut prices to make sales. Paradoxically, you can sometimes make more sales by increasing the price. This is because price, in people’s minds, is closely associated with value. The more expensive the item, the better it must be.
In a row of market stalls selling tomatoes, the stall selling tomatoes at a significantly lower price than the other traders will not necessarily make more sales. More likely a customer will give the trader a wide berth saying, “What’s wrong with them? Why are they so cheap?" Conversely, when confronted with a high-priced piece of design or artwork, people may say “S/he must be good to command that price."
Tip – Are you discounting when you should really be increasing your prices? Is discounting ruining the value perception of your product? Remember that people associate price with value.
Sign No. 5 - You never pay any tax to HMRC
A good accountant will help you to pay less tax, but if you have been in business several or more years and you are not paying any tax, then this could be a sign that you are under charging. If your personal income is never above the tax threshold and/or your corporation tax (if you are limited) is always £0, the chances are that your business is bumping along the bottom. Keeping going, but not going anywhere. Whilst this may not be entirely down to pricing, looking at your pricing is a good step to a creating a more profitable business.
Tip – Check your tax computations. If losses of earlier years are being offset against current profits, things are on the up. If losses to carry forward stay the same or increase, that’s a worrying sign. Time for a price health check.