December 17, 2014

3 Common Small Business Pricing Mistakes

You’re rocking the sales funnel, bringing in new business and delivering to your clients like a super star. So why aren’t your profits growing too?

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You may be an unwitting victim of common pricing mistakes. These drive-by villains can kill your bottom line. Read on to learn if your profit margin is a target.

Small Business Pricing Mistake #1 – Everybody’s Doing It

You’re almost ready to launch a new product, but still haven’t set the price. To save time, and let’s be frank (or Betty or Joe… ) , to avoid the number crunching, you set your price based on your competitors’ prices. Although the lowest is $99, and the highest is $875, most are in a tight range between $425 and $475. Hmm… how about $462? $462.15? Perfect!

Does this scenario sound familiar to you?

There are two basic problems with this approach. The first is the assumption that your competitors are making a profit with that price. Even big corporations can have the wrong price and take a bottom line beating. While I hated hearing it as a kid, this type of pricing has me quoting my mom:

“If all your friends jumped off a bridge would you jump off too?”

The second problem with this approach is apples, or perhaps I should say apples to oranges. How does their expense structure stack up against yours? Is this truly an apples to apples comparison? Or did some Florida oranges sneak in? Even if, and that is one BIG if, their product is priced correctly, your expenses may be higher which would result in a price that is too low for your business.

In fact, if a direct competitor is an exact clone of you, how do you stand out? You can’t be a leader if you’re following someone else.

Small Business Pricing Mistake #2 – Death by 1,000 Cuts

When working with clients on their pricing I invariably hear, “Why are you asking about that? It’s such a small amount?” This profit killer isn’t a drive-by, it’s death by 1,000 cuts (yes that was really a form of execution). Small doesn’t mean harmless.

Consider a weekly expense that is $5. Seems like peanuts in the grand scheme of things. Now multiply that number by 52 weeks, at $260 it doesn’t seem quite so small. What if you were ignoring five different $5 expenses every week? That’s $1,300!

Small things add up, ignore them at your own peril.

Small Business Pricing Mistake #3 – Why Are You Working for Free?

Many entrepreneurs assume that their pay is in the profit margin. Wrong. Profit margin is what your company earns. What about your time? If you did that same work for another company wouldn’t you bill them? Any product or service you sell involved some of your time, shouldn’t you be paid for it?

Look at it another way. What if someone else had done the work? Wouldn’t you have to pay them? Calculate the cost of your time (if it helps, imagine you’re the employee) and include that in the price. And don’t forget to actually pay yourself.

If you still want to work for free give me a call – I have plenty of projects on my desk!

Final Thoughts

Have you made these pricing mistakes? Are there others you struggle with? What would be the easiest for you to fix today to grow your bottom line?


Oops Photo via Shutterstock

41 Comments ▼

Nicole Fende


Nicole Fende Nicole Fende is The Numbers Whisperer and President of Small Business Finance Forum. As a credentialed actuary with experience as a Chief Financial Officer, Investment Banker, and successful entrepreneur, Fende helps her clients learn how to effectively and enjoyably run the financial side of their business.

41 Reactions

  1. Hi Nicole, I have to say that #3 is a killer when you’re first starting out. Too many entrepreneurs work for free. They don’t get paid enough for their time, and they don’t make much in profit, either. For some their goal is just to “break even” on their time. It’s a double whammy.

    – Anita

  2. I agree with Anita, #3 is the one I’ve had the most trouble with. At least when you’re pricing your product you can compare it against other products that may be similar. When pricing yourself and your time it’s hard to know what you’re really worth.

    • Robert it may help you to consider what someone would get paid as a salary to do what you do. There are plenty of free sites online that offer this type of information. Also (warning gratuitous self-promotion ahead) you might want to check out my book, “How to be a Finance Rock Star”. This is one of the things I cover.

  3. Guilty on all three accounts! “How does she know?” “Is she clairvoyant?” Well since I’m fairly certain you did not read my mind….I guess these are common mistakes but it doesn’t make me feel less stupid. I’m off to a session this afternoon…where I bartered for a service I don’t even want in lieu of payment. UGH! Okay…lesson learned!

  4. Make that another vote for Number 3 – we so often ignore the value of our services (or underprice them). Great tips, Nicole.

  5. “Death by 1000 cuts” also applies to our own pricing. Giving a detailed account of services provided is a surefire way to get clients saying, “it took you two hours to do THAT? I could have done it myself in ten minutes.”

    It’s better to give a flat rate in professions like these than have to justify every minute of your time to someone who doesn’t appreciate how much work is involved in getting the details right.

    • Kerry I agree. People who are looking to micro-manage you are never going to be good clients. They will always be looking for lowest price, plus there’s the PITA factor. However internally I recommend tracking it so you can be sure you charging enough.

  6. Nicole, I agree # 3 would be the worst offender on my list. Personally, I struggle with placing a price tag on my own personal worth; but I am learning.

    • Belinda, it looks like you have a lot of company with number 3. As entrepreneurs we often go into business doing something we like, something that comes naturally. The dark side of this, we question why we charge so much for something “so easy”. Remember, you’re worth it!

  7. Yes, yes, yes! Read and commit to memory!

    This is the one big thing I would go back and change if I was starting again in business today. I found when I started my own business, after leaving a normal job, that I still had the mindset where I could do more work without asking the customer for more money. Like the other comments above, this number three trap of doing work for nothing is something we have to watch for and avoid. The other two points are equally valid, however. Value your time and charge a high price; you’re worth it.

    Charging a high price helps to insulate you from all the deadbeat customers who don’t want to pay you, and demonstrates that you are a serious business person. Don’t compete on price – being down there with the bottom-feeders isn’t much fun!

    • Thanks for the input Keiran. #3 is so popular, if I ever have a horse in Kentucky Derby that’s going to be his name!

      Not only isn’t it much fun to compete on price, you’re telling potential clients that you have no other compelling reason or value to bring to the table.

  8. #3 is the big mistake of all. Depending upon the geography and the culture, you may still have to offer something for free, initially, till you are sort of established.

    • Dhana I have no problem with offering something for free, as long as you plan for it ahead of time and build your business accordingly. For example, I offer a free ecourse on taming your fear of finance. That allows people to get something of value and determine if we might be a good fit for business. It’s the stuff you start throwing in after the face that will come back to haunt you.

  9. As a consultant to independent jewelers, I deal with this frequently. Yes, #3 is important. Frequently, valuable services given for nothing seem worthless. That being said, there is both science and art involved in determining how to price merchandise in your store. I frequently find myself asking questions to get Jewelers thinking about basic concepts and their application to specific situations. What overall gross margin do you need to be profitable with your set of fixed expenses? How is this impacted by rate of turn? Have you included cost of packaging when pricing merchandise? Since so many owners think cost times X equals retail, I ask them to consider whether two identical items bought for different costs are not “worth” the same. I have seen stores sit with merchandise both because they paid too much and aren’t willing to take the hit, and (nearly as often) because they truly got a bargain, and the price they have assigned convinces customers that the merchandise is sub-par. Figuring how to price goods properly requires not only knowledge of your products, market and business factors, but also clear analytical thinking.

    • Eric thanks for sharing your experience. I too describe pricing as an art and science. If it was just numbers we could just plug everything into a computer and presto – instant answer. Keystoning (cost times x equals retail) can be very dangerous and should not be used as a substitute for real analysis. A strategic finance person will look at all the factors you mentioned before suggesting a price.

  10. It has been mentioned few times that people fall for mistake number 3 most often. However, when you start your business, you really want to be competetive and stand out in order to beat the competition. If you include the cost of the time you spend when starting up your business, your new price may sky rocket to the lever where nobody would buy your products so it is a hard one. yes, we should be paid for the time we spend on running the business, but we also have to compromise in order to be able to compete on the market with the rivals.

    • Concur with Rafal. Unless you are at your/your company’s capacity, work with some profit is probably better than no work at all – as long as it doesn’t impede on you getting higher value work. I think a lot of small businesses are in this boat. Small companies don’t have pricing power and have to deal with price competition – whether real or perceived – that their prospects subject them too (like the infamous internet quote). It’s hard to walk away from even low margin business when you/your company needs more business overall. The question – when struggling for more valuable business – isn’t about pricing, but creating demand for you/your company…

      • @Rafal I understand what you are saying, however it is important to distinguish between time you spend actually delivering a product or service (income generating activities) and administrative activities. The client should only be paying for the time you spend on or for them. Otherwise you will end up with a crazy high price as you mention.

        @Bill there are times we can’t ignore market powers. Yet there is a better way than just starting with a lower quote. Show your target price, and then offer a limited time / special customer / just because it’s Wednesday discount. Use this to fill up capacity (but don’t discount so much you are buying business). Then over time you can stop or reduce discount offers. However word of warning – too often I see people use this as a crutch rather than competing on value.

  11. How do you show your personal worth in a price driven market; i.e. residential remodeling. Once you submit a proposal you are at the mercy of both the homeowner and ultimately the bank, if the project is being financed, both of whom are very price sensative.

    • Justin good question. Here on my thoughts on this. Even in a commodity market some companies manage to command a premium. Think about bottled water. Heck you can get free from the tap, yet there is actually a brand called Bling that sells a bottle for over $30! In your market perhaps it’s the fact that you have low / zero callbacks to fix things. Maybe you save them more energy later. You’ve been around a long time. Look at why you are different and then turn that into (preferably a tangible) benefit described from the customers point of view.

  12. Here’s one of the most valuable pieces of business advice I’ve ever been given:

    If you tell a customer the price is $1,200 they’ll try to talk you down or go elsewhere. But if you tell them it’s $1,000 a month for 12 months they’ll be overjoyed at the low price. It’s all about perception.

  13. Oops, the original price should have been $12,000. lol

  14. Nicole,
    You mentioned there are several sites out there to determine your monetary worth given your contribution to the company. Can you help me out with some examples? I don’t undervalue my work, but I do look at the bottom line and am concerned that this will have a far higher priority to me than making sure I get my just due.

  15. I have to admit that I’m so used to being my own boss that I occasionally fall into the trap of Mistake #3 but I’m working on it.

    Great post, Nicole.

    • Hi Joyce – yes we all forget from time to time that we *are* a business. You wouldn’t walk into Office Max and say, hey can I have that ream of paper for free?

      Nicole

  16. I was stung by #3 myself, since my first year I wasn’t confident I would make money. As it happens I did, so I paid taxes! I learned that I should have paid myself all along, not necessarily writing the checks but recording the amount owed. That way at the end of the year I could have paid myself something and not owed so much. The next year which wasn’t as profitable was made more unpleasant by having to pay estimated tax on the amount from that first year.

    • Kathryn – Ouch on the taxes. Although the good news is that you had a profit, the bad news is obviously what it cost you. If you aren’t aware, if you expect to make a profit you should be filing quarterly taxes with the IRS.

  17. Great, concrete and simple advice Nicole! Point #2 resonates with me especially as I tend to take the ‘it’s no big deal’ mindset with those small, incidental expenses. Thanks for the reality check!

  18. One can’t be a leader by following someone. Great message.

  19. Something that appears to have been left out here; the one major factor in governing price, is what the amount that a the public are prepared to pay!
    Many large companies spend huge budgets on market surveys to get this amongst other information.

    I personally feel that a smaller business can run their own survey by simply demonstrating the features & then asking a sample mix of people, if they like the product or service & how much would they feel comfortable spending?

    Most people will give an honest answer & the majority rules.

  20. Great advice. I especially appreciate the reminder from #1 to not assume your competitors are profitable.

    One of the biggest missed opportunities for small business is in pricing. In almost every case they look at the product and try to figure out what the market will pay for it. The better approach is to decide what you want to price it at and then figure out a way to add enough value that it makes sense. People pay for convenience every day.

    Are there additional benefits you can add to your offer that your competition isn’t willing to do?

    By basing your pricing on the competition you turn your product in to a commodity. When you add value based on your client’s needs price becomes less of an issue.

    If what you do is important, and I am sure that it is, the absolute worst thing that could happen to your customers is that you go out of business. It is clearly in their best interests that you remain profitable.

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