Small business owners are often stymied by the concept of pricing. The other elements of Marketing; namely, Product, Promotion and Place, typically receive more attention to the detriment of many a business. Since this is such a critical topic for business success, Cybertary will be featuring a different aspect of pricing over the next several newsletters. We have previously covered the factors that contribute to setting your pricing and the different strategies you may choose to employ. In this, the third article of the series, we will explore some of the pitfalls and things to avoid in your pricing strategies.
My Business is Different
Whether you are big or small, offer a product or a service, there really is no difference in pricing strategies. Even though every business like to think they are unique, the fundamental strategy is this: know what you have to make to pay all of your personal obligations – what it costs you to live, what you have to take home/pay yourself to run the business.
The second part of the equation is what are the costs to run the business – all of the costs. If you are a mechanic who brought in tools and equipment that you owned prior to starting your own business, don’t overlook that investment. Knowing your cost structure, what is really took to get your business launched at the outset and what it continues to cost you to run it represent your operational costs. Make sure you have a handle on all of them. Lack of knowledge of your cost structure is one of the major mistakes that business owners make.
Fear Factor
Once you know your costs, set your prices. I won’t repeat the strategies that we explored in Part I and II. Here are links to the previous articles that explored the factors that contribute to setting your pricing and the different strategies you may choose to employ.
The second major mistake that business owners make is that they are paralyzed by fear. They undervalue themselves and the contributions that they make, what differentiates them from their competition. They fear that they will lose their clients if they charge a reasonable rate that covers all of their costs, allows for a return on investment and recognizes the overall value of what they deliver, be it a product or service.
Further still, once they are in operation, they fear raising their prices will drive their clients away. It takes courage – as your business grows and your costs grow (employees, space, other variables), you must adjust your pricing accordingly. The growth phase of your business is exciting and fun but it may be the most dangerous after the initial start-up. You need to understand the impact to your cost structure as you grow in order to sustain the business through it.
It Takes Money to Make Money
Another, common pitfall of a business owner is not having sufficient working capital to survive the ramp up period for your business. For some businesses, ramp up could be 6 months or less; for others, particularly those involved with research and development, the ramp up could be 3-5 years or more. When creating your business plan, you need to understand the nuances of your industry to appropriately allocate capital to see you through the ramp up.
During the ramp up and beyond comes another mistake that business owners make; that is, not reserving enough capital for marketing, followed by the 2nd marketing error, cutting your marketing budget. You need to continuously invest in the business and consistently market. How else will your prospects know you are still out there?
*Many thanks to JoAnn Forrester, President, S.I. Business Associates, for sharing her wealth of insight and knowledge on pricing as well as the title for this series.
