Last week you walked into a business, or viewed something online and in your mind questioned the price of a product. Something didn’t seem quite right. Perhaps the item or service seemed too high? Perhaps it seemed too low. The truth is that there are a number of pricing mistakes that business leaders make over the duration of ownership of their business. I have made many of them over the years and hopefully have learned from some of these mistakes.
1. Pricing too low! Many small businesses set pricing policies that are too low. We believe that every customer is looking for the lowest price and as a result, we try to meet these expectations and when we do we are unable to make a profit!
2. Not taking all your costs into account! Often as small business owners we set our prices based on product costs but we don’t calculate all our expenses. Have you calculated how much you are spending on freight, marketing, office overhead, labor, credit card costs or anything else that is contributing to getting that product to the customer?
3. Holding Prices, the Same for Too Long! This is a common mistake of many businesses. We set a price for a product and then forget to change that price if the market goes up or down. Currently in a time of inflation there is a constant need to adjust prices.
4. Using the Same Margin on All Products or Services - I got caught on this mistake for a long time until I realized that I had some departments within my business that were not price sensitive. Understanding which areas of our business have different values for different customers or segments of the market, can change the way we price our products and receive our revenue.
5. Discounts, Not Value Added! So often in business we decide we need to discount a product or service to drive sales. But cutting our prices is giving away the very profit we need to keep our business running and provide wages for our staff and ourselves. A better way to think about this is to determine ways that you can add value. Is there something you have that you can throw in to ensure the sale but that doesn’t cost you much or won’t cut into your profit?
6. Failure to Understand the Difference Between Markup and Margin. This is a rookie mistake that I made in my business when I started out. I priced everything by a markup, but a 50% margin is different from a 50% markup. A $20 dollar product with a 50% markup is $30 while a 50% margin would be $40.
7. Setting Commissions for our Staff based on Sales and Not Profit! Having a structure where your staff share in the profits of the company can be a great policy for some small businesses. But when we have commissions based strictly on sales, our staff can sometimes find ways to drive sales that don’t make any sense to our bottom line.
8. Having a Reactionary Pricing Strategy! How many times have you decided that you needed to change prices … just because? Without having a strategy for reviewing and pricing your products, you are setting yourself up for misery.
Most small businesses don’t think about pricing until it is often too late. Setting a policy for your prices and having a regular review of those prices and strategies can enable you to price for profit and set yourself up for success!
Dave Fuller MBA, is an award winning Certified Professional Business Coach is the Author of the book Profit Yourself Healthy.