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Come On Down – Are Your Prices Right?
By Dana Wallert
Now, I’d love to talk to you about strategies for winning on Bob Barker’s show. Unfortunately, I have absolutely no expertise in that area. Unless you count sitting on the couch thinking that I know how much to bid in the Showcase Showdown or my longtime dream of playing Plinko! No, what I do want to talk about is the difficult task of setting price points for your fledgling small business.
I think there are two ways that entrepreneurs can go wrong when initially setting their pricing. I must note here that since I am in the service industry that is where I will be focusing, but I think the same principles would apply to a product based business. Now what are the two major pitfalls? To me, they’re simply setting your prices too low or too high. I know that may sound oversimplified, but let me explain.
Before we discuss either, let’s address how we identify what’s low and what’s high. By the time you’ve decided what services or products your business will be offering, I’m sure you’ve seen hundreds of your potential competitors’ businesses. When exploring their businesses, either online or off, you took note of how much they’re charging for the different services and products. After taking all of that in, it’s pretty easy to come up with the industry average price for a particular service or product.
Now, let’s get back to our main danger zones. First, you may consider offering your product or service at a considerably lower rate than anyone else out there in the marketplace. Initially, this may seem like a great idea. What a wonderful way to beat out the competition. There are two main issues with this tactic though.
First and foremost, there’s probably a reason your competitors have set their price points where they have. If you choose to undercut them severely, you might learn all too quickly that reason. There are always hidden costs in business, and your prices must take those into consideration.
Secondly, you’re not the only one who will be researching multiple companies providing the same product or service. Your potential customers will undoubtedly be doing the same. Here’s the problem, most people will automatically question the quality of the service or product you provide if you are charging significantly less for them than all of the more established competition out there. Sometimes you can offset this risk by being very upfront about the reasoning behind your lower pricing. For example, you might offer a 50% discount on a set number of hours or an initial product order to new customers. As part of the offer, you can explain that you are a young company that is very eager to build your reputation. Sure, some people are going to want to go with someone who’s been around a bit longer, but you will more than likely win over some people with your honesty!
Alright, so it might have taken me awhile to explain why pricing too low can be dangerous, but what about pricing too high? Well, it’s just as dangerous but not nearly as complicated! It’s just human nature. If you find 2 similar companies providing comparable services or products, your instincts will tell you to take the best deal. I know that may sound contradictory to what we discussed in reason two for not pricing too low, but it’s not. The difference here is in the “similar” companies. No matter how great a deal they’re getting, it’s not saving the buyer anything if the provider isn’t reliable. They customer will most often go with the company that they have the most confidence in AND offers the best value.
Most importantly, don’t be afraid to tweak your prices. As long as you honor any deals that you’ve made, you can always change your pricing. You will be able to tell very quickly how well you’ve gauged your price/cost ratio!
So when you get right down to it, maybe pricing really is like the Showcase Showdown. If you remember how the game works, the person who guesses the closest to the price without going over is the winner. I think you can think of your price points in the same manner. You want to set your prices very close to the average of your industry without going over. And hey, you never know, maybe you’ll guess the exact price and win both showcases at the same time. No, sorry, what I meant to say is if you get the pricing just right you’ll cash in with a higher number of customers!