Starting A Business ~ The Dangers Of Under Pricing
Most people who run their own business will admit that when they first started out they were pretty clueless and had a lot to learn. This is especially true if you’re setting up a new business in a sector where you have no prior experience. One of the key areas where people often make mistakes is pricing. Pricing your product or service correctly is key to the success or failure of a business. Pricing can be even more tricky in the early days of a business because people are so desperate to gain new customers or clients that they often undersell their services. While marketing strategies such as introductory offers are not always a bad thing, there is a danger that under pricing your services too much could negatively affect your business in the long run. Why?
The first problem with under pricing your product or service is that you might lose brand credibility. Have you ever noticed that coffee shops like Starbucks and Costa always seem to be busy, even though their coffee costs more than it might from the cheap cafe around the corner? Have you also noticed that branded soft drinks like Coca-Cola and Pepsi are two of the best selling soft drinks on the market, even though cheaper branded soft drinks are sold right next to them on the shelves for up to a quarter of the price? This is because the majority of people are willing to pay a premium for a quality product. Sometimes lowering prices can do more to harm the credibility of your service or product than help it.
You Need To Make Money
When I first started out in business a friend of mine gave me some great advice. He said that in business you compete in one of two areas, you either compete on price or you compete on service. If you choose to compete on price then you’ll always be busy, but the chances are you’ll be a busy fool because you won’t be making much money.
To illustrate let’s pretend I’m a hairdresser and the going rate for a haircut is £10, I open a salon and decide to win business from my rivals by charging £5 per cut, due to my cheap prices I get a lot of people through the door and I start cutting hair. By the end of a long 15 hour day I’ve managed to cut the hair of 40 different people and have made £200! After deducting my salon costs this profit reduces to £150 so I’ve made £10 per hour but hold on a minute, I was being paid £12 an hour to work for someone else!
My business rival around the corner charges £10 per cut and has only cut the hair of 25 people today, ha ha. When I think about it though he has made £250 today and has only worked a 10 hour day. After deducting his salon costs of £50 he’s made £200, £20 an hour!
It’s all well and good winning lots of business by undercutting your rivals but if you have to work every hour under the sun to maintain those contracts and still don’t make any more money than you would in an employed position then what’s the point? You might as well get a job and enjoy the benefits that steady employment can bring.
It’s Not Easy To Raise Prices
Another problem with under pricing your product or service is that customers and clients become used to paying a certain price for it. It’s not always easy to raise prices at a later date without hurting or even losing your business.
Somethings Got To Give
It’s almost impossible to compete on both price and service. If your going to supply a cheap product or service then something inevitably has to give. Often the sacrifice is the quality of your product or service. Think back to our hairdresser rushing to cut the hair of as many people as possible and tired from working such long hours, surely the quality would suffer.
Find Other Ways To Add Value
There will always be someone out there who will try to undercut your prices, let them get on with it. I’m not saying you shouldn’t find innovative ways to give better value to your customers, but don’t get dragged into a price war. Take pride in your product or service and do your best to stay competitive on price, if you value your business offering then others will too.