Why is it so difficult to figure out what to charge for things? Why is the learning curve so painful?
There is a sweet spot for every business, that allows you to turn a profit and still deliver a greater value to your customer. But there are usually few to no guidelines to help you find it. And so you begin the process of figuring it out the hard way.
The biggest problem, especially for newer businesses, is underpricing or price beating. When you’re desperate for a sale, any sale, it’s a natural temptation for sure. But it’ll kill your business and possibly your spirit. Don’t do it.
Here’s my story:
Service businesses are tough. Product businesses are easier. Or so I thought when my husband and I decided to open a retail store, after years in our respective service industries.
It seemed like sales would be a straightforward process with products – people want it or they don’t. With my background in purchasing and merchandising and his in sales, we would make sure we had products people wanted.
And we did. Our shop was filled with unique, well-made, crushworthy home furnishings. People definitely wanted them, and we heard nothing but great feedback from our customers. All was great except for one small thing: we weren’t making any money.
Our prices were too low, plain and simple. We were afraid to lose sales to our bigger competitors so we slashed and stripped our pricing to the bone – a tactic we thought would give us an edge. But we soon came to realize just how many problems come with being the “cheap kid” on the block.
There’s the obvious first reason – you can’t make ends meet. It’s important to factor more than just the base costs into your pricing. What we thought was a reasonable markup turned out to be missing a whole bunch of important costs in overhead and marketing, sales & customer service time, packaging costs…so for each sale we worked our asses off to get, we lost money.
For anybody with common sense, you learn that part of your lesson pretty quickly. The “true cost” of your offering. But the bigger problems come next. For one, you have now spent time and money establishing yourself to the wrong audience. The people who expect more for less. That means you have to to invest more time and money to a) find a different audience b) educate your customer to expect something different.
Both are tough, time consuming and expensive. But the real hurdle was our own mindset. Because of our closeness to the situation and our emotional ties to the business itself, we were still desperate for consistent sales. This created a “lack mentality” and blocked us from seeing from the perspective of our ideal customers.
I talk about perspective all the time, and this is a prime example of a lesson learned the hard way. In order for our home furnishings business to thrive, we needed to market and appeal to customers who had a completely different lifestyle than ours. It required us to know and empathize with their needs and desires, to be where they would be and define value the way that they did. But we got stuck in a market that made sense to us personally, and couldn’t break through until it was too late.
The moral of the story:
While I do think that pricing is a unique process that you have to explore for yourself, I can tell you from experience to be careful in assuming that all sales are good sales.
Be sure to calculate your true costs from the very beginning, so you have a rock bottom number that you absolutely must meet. And then do what you gotta do to drum up sales, but try not to step in a bargain basement market – because the greater cost is your own worth.