Many people price to hear “yes.” They do not want to encounter price objections, so it’s simply easier to set a low price. This is a dangerous practice for any business, but it’s particularly acute for small businesses with little pricing experience.
First, there is the simple math. If you sell $100 worth of goods and make $20 in profit, how much more do you need to sell if you offer 10% off? Now you need to sell $180 to make $20 in profit. Will your 10% discount drive 80% more business? Note that in this situation, if you offer 20% off, you will never make a profit, no matter how much you sell.
Let’s suppose your 10% off does cause business to grow 80%. Now you’re breaking even from product sales, but you’ve sold twice as many goods. Your supply chain, inventory, sales, and support require more effort and more overhead. Not only might you go out of business if you do not achieve 80% sales growth, you will work yourself to death.
Now let’s look at the converse. If you raise prices by 10%, revenue can fall by a third and you can still make the same amount of money. Even if your price increase cuts business that dramatically, you’re still breaking even. Even better, you have lower overhead and less work to do, so you can server your customers better. So if an additional one third of your prospects tell you “no”, you still come out ahead. And if you never hear a price objection, chances are your prices are too low.
See JD’s Blog for another view of this for the entrepreneur concerned about leaving money on the table, and How to Sell at Margins Higher Than Your Competitors: Winning Every Sale at Full Price, Rate or Fee by Lawrence L. Steinmetz and William T. Brooks for a big business perspective.
This is something we grappled with as we were starting our business. The temptation is to get the sale at any price. But a few years of serving low-margin customers has taught us that they are often more demanding than the high-margin customers. So not only do we not make money serving them, they are a pain in the rear.
Increasing our prices has pretty much been a winner across the board for us.
Women About Biz
Wow! Your article really explains this concept of pricing in a way that I can understand it.
I also believe that clients looking to get things “dirt cheap” or complaining that small prices are too much really aren’t placing too much value on your products or service and they normally will not become your best customers. I now this firsthand.
I’m going to make sure I point my viewers to this blog!