Pricing is one of the trickiest elements of running any business. Whether you are selling cars or houses, wingnuts or laptops, the price point you decide on can make or break your business.
Set prices too high and you can freeze yourself out of the marketplace. But setting prices too can not only cut into your profits, but also frame your products as low-end or cut-rate.
Pricing is especially complicated for entrepreneurs who essentially are selling themselves in the form of their brand. Many take an accountant’s approach to profits:
In order to make $XX,XXX amount of money in a week/month/year, I have to make YY,YYY number of sales at a price of $ZZ.
That’s a lot of variables! It’s also TOO MUCH MATH (Brain explodes!)
But the pricing paradox is universal. It’s something that every entrepreneur, business owner, and even corporate CEO have to grapple with all the time.
Yet you shouldn’t let it ruin your day. In fact, the pricing paradox is completely fixable. Setting the perfect price point is even EASY once you know how to do it!
So let’s learn how …
Common Pricing Errors
Before we get to the right way to set pricing, let’s look at the biggest mistake most people make: Underestimating their value.
Like most new entrepreneurs, I entered my chosen marketplace wanting to make a name for myself. But I also had the intelligence to realize that NOBODY KNEW WHO I WAS.
So in order to instantly stand out from all the rest of the competition, I offered my services at drastically discounted prices.
This had two results:
- It instantly brought me a lot of business
- It simultaneously had me working my rear end off and not getting anywhere financially
This is actually very very common … especially among people making the jump from traditional 9-to-5 office work to the exciting world of owning their own business.
When you work for a company, most of the real costs of running that business are behind the scenes. You punch the clock. So you don’t worry about things like paying the rent on office space, utility bills, insurance, taxes, vacations, sick time, and overhead.
But when you jump into the driver’s seat, all of these things are now YOUR responsibility.
So when you set your prices low to establish your reputation and build your client base, you actually often end up LOSING MONEY rather than making it. And that’s not a sustainable business model.
Yes, losses are generally considered to be an acceptable part of a new business. In fact, any MBA program will teach you that they need to be built into your startup costs. But you can’t bleed money forever.
Eventually, you need to get paid what you are worth.
Determining Your Value
Undervaluing your worth when you first launch your business is actually very common. But successful businesses sooner rather than later make the pivot to proper pricing.
The first thing you need to do is understand your true costs. A month or two of running your business should be enough to gain the knowledge you need to estimate your business expenses.
Once you can put a dollar amount to your true costs, then you can start to build the formula you need to set your most beneficial price point.
Now comes the really tricky part: Convincing all those clients you attracted with bargain basement pricing to start paying you what you actually are worth.
Plus, appealing to new clients who are open to paying your new (higher) prices.
There are a couple of important factors to keep in mind:
- You Are Worth It – You need to prove that your are unique and valuable. Show that the products or services you offer are superior and represent a strong price-value proposition.
- Say Goodbye to Unwilling Clients – If your current clients balk at paying you what you are worth, it’s probably time to say goodbye. You are growing as a business owner and if they aren’t willing to grow with you, then you will need to replace them with new clients who will.
- Make the Transition Easier for Your Clients – But before you write off any old business, make sure you doing everything you can to hold onto them. This may include “grandfathering” in your original clients at a lower rate (temporarily) until you can grow your business at your higher price point. Or it can mean scaling back the products and service your offer at the lower prices and gradually introducing new pricing for bigger and better products or services.
- Offer Additional Value – One of the most effective ways to get higher prices for existing products is to offer additional value. This can take the form of faster or free delivery, improved quality, better and more responsive customer service, and so on. What you offer is going to be specific to our business. But offer SOMETHING.
Your Business Goal
Raising prices is never easy. But it’s almost always necessary.
Ultimately, it comes down to setting your business goal: Do you want to grow and be more successful (YES!) or do you want to be loyal to your existing client base at the ultimate cost of your livelihood (NO!).
When it’s time to raise prices, you will need to be confident enough in your abilities to prove to your existing and future clients that you are worth their investment in your business.
And when you can do that, the result is … PRICELESS!