Pricing is a critical factor for the success of any product or service, and one of the trickiest to master. Many small businesses experience difficulty with pricing. Typically, they either undercharge or overcharge– on the one hand, generating paper-thin profit margins (if any) or, on the other, scaring away potential customers before they even try the product.
This may come as a shock, but in some cases, you will not attract enough business if your prices are too low. Because here, the operating adage in the customer’s mind is: “you get what you pay for”.
For example, if you are positioning a luxury product or a one-of-a-kind product, and your price is too low, you have telegraphed to the market that you don’t really believe your product qualifies as a luxury or a rarity. If it were, you’d charge accordingly.
Think about this:
Imagine that your product sells for $100 and has a 10% profit margin. If you increase the price by 10% (to $110), the margin is now $20. That represents a 10% price hike and a 100% profit increase.
A price rise as small as 1% yields a profit increase of 10%. Unfortunately, most people don’t think of it that way.
Will you lose money?
No. If you sell to 100 customers a week prior to the price hike, total gross margin equals $1,000. Now, let’s say that after the price increase, business falls off by 50 customers – You’re still earning $1,000! However, it will cost you less to service those 50 remaining customers, so net profits will be higher.
(Obviously you need to strike a balance between margins and total volume, but you get the point.)
Why not go through this exercise and see how it relates to your pricing?
Think about it: 10% increase in pricing = 100% increase in profit. Or, 5% increase in pricing = 50% increase in profit, or 2%, or even 1%. Consider the compounding effect over 5 years.
This article by Trevor Payne, one of our mentors.