2016-12-09 00:00:00 Growing a Business English Learn about a wide variety of pricing mistakes that small businesses might make and learn how to fix them. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/03/Restaurant-staff-detemines-pricing-data-in-kitchen-by-cooking-equipment.jpg https://quickbooks.intuit.com/ca/resources/growing-business/common-small-business-pricing-mistakes/ Common Small Business Pricing Mistakes

Common Small Business Pricing Mistakes

2 min read

Unfortunately, pricing mistakes can be so dangerous that they can put you out of business. Here are five different pricing mistakes that are common amongst small businesses and some ways to fix them.

Pricing on Cost Rather Than Value

One major mistake small business owners make it to price based off of product cost rather than product value. If cost-based pricing leads to much higher prices than the customer believes the product is worth, sales will lag and eventual discounts will need to be implemented. Conversely, if the cost-based pricing leads to lower prices than the customer believes the product is worth, extra revenue is lost. The lesson is not to take a simple approach and price a product based on 2x, 3x, or 10x the cost. It’s smart to take the time to understand the product’s total value, as value and cost have practically nothing to do with each other.

Forced Profit Margin

Pricing a product based on a predetermined profit margin is a mistake. Profit margins evolve over time and can’t be directly forced just because of a pricing decision. The solution to this problem is to test prices and see which leads to the maximum profit margin. Try not to force a single number because you may be leaving money on the table.

Not Changing Price

Markets evolve, customer perceptions evolve, technology evolves, and so forth. If one thing is certain, the only constant in business is change. Being reluctant to change price can lead to disaster. Depending on your product, you might need to cut prices by 25% (or some other number) to remain competitive. Or, depending on possible upgrades to the product, a business may be entitled to increase price. The right thing to do is review the prices of all of your products on a monthly basis to ensure revenue is maximized.

Giving All Customers the Same Price

Often, giving all of your customers the same price is a mistake. Instead, it’s wise to classify customers into buckets, especially if your business is a service-based business. Not all clients are equal — some demand more and must be charged more. Tier your products and services, then tier your clients, and lastly tier your prices. Match them accordingly for the benefit of maximum revenue and the most efficient use of time. With that said, analyze your business to make sure that you aren’t spending the majority of your times on low-paying clients. If necessary, you can consider firing them so you can focus on the best quality and highest paying clients.

Paying Sales Commissions Based on Revenue Instead of Profit

This problem does come down to price — revenue is not the profit. Paying sales commissions based on revenue can be a costly mistake if the net margins are not in good order. As well, both revenues and net margins are affected by price. If a small business finds that it is paying out too much for commission costs, this issue should be looked into.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Competitive Pricing: Aligning Yourself With the Market

Pricing your company’s products or services is one of the most important…

Read more

Improve Your Profit With Value Pricing

Pricing of your products affects your profits and your sales volume. One…

Read more

Cost Determination: A Guide to Pricing Strategy

The success of your small business is determined by a variety of…

Read more