Last week, you walked into a business or viewed something online and you 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.
Leaders make a variety of pricing mistakes over the years of operating their businesses. I’ve made many of them over the years, and hopefully, I’ve learned from some of these mistakes:
Pricing too low
Many small businesses set pricing levels that are too low.
We believe that every customer is looking for the lowest price, so we try to meet these expectations. But when we do, we’re unable to make a profit.
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’re spending on freight, marketing, office overhead, labour, credit costs or anything else that contributes to getting that product to the customer?
Holding prices the same for too long
This is a common mistake of many businesses. We set a price for a product then forget to change that price if the market goes up or down.
In a time of inflation, like now, there’s a constant need to adjust prices.
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 weren’t 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.
Discounts, not value-added
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 how to 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?
Failure to understand the difference between markup and margin
This is a rookie mistake that I made when I started in business. I priced everything by a markup, but a 50 per cent margin is different from a 50 per cent markup. A $20 product with a 50 per cent markup is $30 while a 50 per cent margin would mean a $40 price.
Setting commissions for staff based on sales, not profit
Having a structure where your staff shares in the company’s profits can be a great policy for some small businesses. But when we have commissions based strictly on sales, our staff can find ways to drive sales that don’t make any sense to our bottom line.
Having a reactionary pricing strategy
How often have you decided you need to change prices … just because?
Without having a strategy for reviewing and pricing your products, you’re setting yourself up for misery.
Small business operators often don’t think about pricing until it’s 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 business coach and a partner in Pivotleader Inc. For interview requests, click here.
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