Why You Are Probably Undercharging and How to Increase Your Price
February 20, 2009
When we are told the economy is suffering, nervous businesses often do two things:
- Discount
- Cut advertising
The second might not be out of cutting costs, it could be a direct result of the first. When you cut prices you cut your margin, and when you cut your margin you have fewer spending options.
Discounting works for companies like Walmart because they have access to huge cash reserves and because they can clean up when all the competition has gone. You probably can’t.
Another cause of low prices is lack of confidence. The “We’re not worthy” effect.
I see this all the time with freelancers, especially writers for some reason. They struggle to justify their work in their own mind, so can not communicate value to prospects, and therefore end up with a low hourly rate.
Of course hourly rates are not an ideal way of pricing but in many cases this is what customers demand, and it is easier price to work out. Many people recommend you divide your required income by your available work hours to arrive at an hourly rate. Instead I recommend you charge what you are worth, preferably as a project fee rather than an hourly, but if you must do hourly charge more of a premium than bargain basement.
If you have a low price because you want to increase volume, then fair enough, providing you are still bringing in more revenue than the business is costing you, and providing you can manage your overhead to the level where you can still market. A low launch price can work, but don’t get addicted to that low price if the market can sustain higher prices!
Fact is low prices put you at a disadvantage:
- Your per-order value is lower therefore you need more orders to make the same amount
- You become perceived as lower quality
- Small prices can bring the most difficult “bargain-seeker” customers
- Without high margins you can not afford to advertise or effectively market
- By focusing on price you do not establish effective differentiation or brand
I was talking on the phone last night with a guy who is working with a log home developer. He has a competitive advantage in his area because of his high quality coupled with low prices. Whenever I hear this it always makes me smile - if the quality is there, all he needs is better marketing and he can raise his prices and not lose any custom. Any time people are surprised how cheap you are while delighted with your work you know you are not charging enough. When you increase your margin you have options in the market, you can reinvest that difference in your advertising, your brand or other parts of your business.
There are three ways you can raise your prices today:
- Just raise them - If nobody complains you are too expensive then you are too cheap! Put prices up until people stop ordering.
- Compare - Where are your competitors? If you are toward the bottom then you can happily raise your prices within their range. While I don’t recommend being guided by your competition, this is a low risk route.
- Boost price along with value - Work out the true value of your offer and raise prices accordingly, while articulating how exactly your offer is worth far more than you are charging. You probably throw some things in for free without thinking about it that you do not describe that have real benefits.
- Bundle - If you have products or services that go together, bundle them together into a nice package and sell it as an all encompassing option.
- Split - The alternative to option 4 is to break apart existing offers and sell the pieces. This can have two benefits, you can sell the parts individually, and as cross-sells, and make the bundle more attractive as an up-sell.
My recommendation is that you increase your prices and use options 4 and 5. Get your customer in the door by showing exactly how much value they are receiving then up-sell and cross-sell to increase your average order value.
Do you know if your prices are too high, too low or just right? Better find out!
Do You Need Investment For Business Software?
February 16, 2009
I am not that into politics, but some of the stuff that is on the news today just makes me laugh.
As a cure for a world economic downturn rather than innovation, consumer confidence and better infrastructure, apparently small businesses need banks to give us more loans.
Maybe you are looking for a loan, but before you go snapping up that new top-end Sony with MS office and all the trimmings, first ask around your tamest and most friendly geek friends.
I bet they will tell you the same thing I would tell you; there is a lot of life in old hardware if you are just smart about the software you use.
- You don’t need to upgrade to every version of windows
- If all you use is Office, web and email, check out Linux and Open Office
- Refurbished computers are usually more than adequate for office use in fact
- Even better, check out pure web based applications like Google Docs and Easy Billing.com
While I would never say everything can be done this way, it might well cut your costs by a huge amount.
Rather than looking to banks, we can instead take our own balance sheet as a guide!
Add Value by Having Fun
February 9, 2009
Think back to when you were a child. Did you want to be the one to open up the cereal box? I did, because I wanted to get the free gift before my brother. Of course I wanted to eat the super-sweet cereal, but very often the choice of which particular brand we asked for depended on the promotion they were running at the time.
Same with comics. I had my favorites, Spider-Man usually, but if there was a gift taped to the front of a competitor, my loyalties about the B and C-List comics could be swayed.
Now, I am not saying your customers are going to choose you because of a tiny water pistol or plastic kazoo, but in a way we are all looking for that extra “something” that will tip the balance in our choice of merchant or service provider.
People like to work with people they like.
Read that twice, it is a bit of a tongue twister, but it is true. Think about the companies you would return to. Which were instantly persuasive? Who is memorable? Are there people you would jump at working with again?
How you approach your work can make all the difference. People pick up the signals without you explicitly saying “we are nice people, fun to work with”. If you make it a priority to both deliver well and have fun doing it, then not only will your business dealings be less stressful, you will find you get more work into the bargain.
You know what the absolute best part is? When you have fun, you exceed expectations, just because. For your customer that is kind of like finding a gold dabloon at the bottom of her cereal box.
Do you have fun while working hard? Or am I wrong, do you hire service providers you don’t like all the time? Please share your thoughts in the comments …