One of the very common business mistakes that new business owners commit is undercharging. People undercharge for so many reasons, the most notable of which is fear of rejection and lack of self-worth. Many new business owners think that if they lower their prices, they will attract more clients. While this may happen, your prices need to be based on the value of your services rather than on your own insecurities.
There are lots of problems that underpricing can create for you.
First of all, lower prices do not guarantee more sales. Typically ‘premium prices’ have the largest market share. Need convincing? Which soft drink has the largest market share? Coca-Cola does, and it’s also the most expensive. Which washing-up liquid has the largest market share? Fairy Liquid, and it’s also the most expensive.
The biggest problem with underpricing is the kind of clients you will tend to attract. You may attract more clients in terms of quantity, but the quality of clients will suffer tremendously. Clients who are bargain buyers are usually the most difficult to deal with. Think of the client who had endless requests, seems to be never satisfied and gives you a headache. That is exactly the kind of client you want to avoid.
Another problem with underpricing is that it can hurt your market positioning and image. Think of how you would like to position yourself among the competition and in the minds of your clients. Are you positioned in the penthouse or in the basement? Whatever you choose will give a strong message about your branding and the quality of your service. Very often, underpricing ends up altering the attitude of the customers who now believe the real value of the product or service they bought is the discounted price not the full one.
The best way to ensure you are not underpricing is to use ‘value-based’ pricing, rather than ‘cost-based’ pricing. When setting your price, think about the overall value that your service can deliver. As a result of your service, will they be able to make more profits or save money? If so, how much? Even if you are delivering a service that doesn’t have a direct financial impact, you can still estimate the value of it. For example, if you coach parents on ‘How to Have Happy Children’; what price can anyone place on having happy kids? Definitely a high one because the desired result has so much worth.You may also need to calculate the emotional and financial cost of having unhappy children and use that as a guide to justify your prices.
I once heard marketing guru Dan Kennedy say that if you aren’t losing 20% of your business on price, then you’re probably undercharging. In other words, if a small number of people are telling you ‘it’s too expensive’ that is a good sign! Trust me, it is better to go broke overpricing than underpricing.