July 28, 2015 Pricing Strategy en_US Pricing your product or service is never an easy task. Find out what you need to know in order to avoid losing profits by pricing too low. https://quickbooks.intuit.com/cas/dam/IMAGE/A7mVcaXFx/c7b1cfc3f73f9b649e24eb5d5472754d.jpg https://quickbooks.intuit.com/r/pricing-strategy/are-you-pricing-your-product-or-service-too-low Are You Pricing Your Product or Service Too Low?
Pricing Strategy

Are You Pricing Your Product or Service Too Low?

By Rieva Lesonsky July 28, 2015

Small business optimism is up, according to the latest NFIB Small Business Optimism Index. Along with the upbeat attitude, many business owners are finally confident enough to raise their prices. Does that mean it’s time for you to raise your prices too?

Prices usually rise as the economy gets better. Some tell-tale signs it may be time to raise your prices include the following:

  1. You’re selling more, but aren’t making more profit. Check the books carefully. Have your costs increased as your prices have stayed the same? Besides costs of materials, have you hired more people, increased your marketing spend or devoted longer hours to servicing accounts, leaving you less time to add more clients?
  2. Do you have too many clients? If your prices are so low that you have more clients than you can handle, it may seem like a good problem to have, but your business will suffer in the long run. Are you missing deadlines, not getting back to customers in a timely manner or getting more customer service complaints than you used to? Raising prices can ease your workload and boost profits.
  3. What are your competitors charging? You may think having lower prices than everyone else is a competitive advantage. But if your competitors are charging more and not having to work as hard, who’s really the smart one? If you’re offering more than your competition, it only makes sense to charge more—and let your customers know why.

The Price Is Right

To make sure you’re not pricing so high you’re turning off customers—or so low you’re not making a profit or even covering your costs—you need to start at the beginning and evaluate your business.

  • How much does it cost to operate your business today? Include fixed costs (e.g. rent, financing costs) and variable costs (e.g. utilities, mailing costs and marketing expenses). Have recent economic changes like rising gas prices affected your expenses in some way? Have manufacturing prices gone up, or have new overhead costs come into play? What about labor costs? Have you recently hired, therefore increasing your labor costs, or decided to “go virtual” by hiring only independent contractors, lowering your labor costs?
  • What are your revenue and profitability goals? Set a goal for how much profit you want your business to generate over the coming year. For example, start with a 10% increase, then determine how much revenue you’ll need to reach that goal. What is the estimated product volume you must sell to make your goals? To increase revenue, your expenses will most likely rise as well. This is because you’ll have to hire more sales staff, increase your marketing budget, etc.
  • Do a competitive analysis. You might have looked at the competition carefully when you started your business, but the times have changed. If you started your business during the recent recession, then you know prices were low and businesses were desperate for sales. Look at your competitors today and see how—or if—they’ve altered their pricing strategies.
  • What is a consumer willing to pay for your products or services? Figure it out by using either a “cost-up” or “price-down” view of your pricing. Cost-up pricing starts with the true costs of operating your business and helps you determine a profit margin. Price-down pricing works by looking at market rates and works down from there. Using either perspective, work back to your cost of manufacturing. If your products or services cost less to produce, charge less. If your product’s value is greater, then charge more and tell your customers why when they ask why your prices are higher.
  • Should a service business charge by the hour or by the project? You could offer both to your customers and let them choose. It could also be offered as a marketing choice: “I charge $100 an hour but will do this project for you for a flat rate.” Really, the decision depends on industry norms and the terms of the project. If you charge by the project and timelines and scope aren’t specific enough, you could be in real trouble and be forced to put in more work than you expected. Charging hourly almost always means more money for your business. But if you need to charge by the project, make sure you put time restrictions on the project and indicate how many revisions you’ll provide.

When you do decide to raise your prices, make sure you raise your prices with confidence and don’t apologize. Apologizing sends a message that you really didn’t have to raise prices. If you’re proving value, then customers will understand. Be sure to give clients and customers plenty of notice for price increases so they aren’t taken off guard.

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Rieva Lesonsky is a speaker and author focused on entrepreneurship. Read more