A small business owner is challenged by charging what you are worth, having a healthy enough profit margin and collecting on sales. In a previous post I discussed the importance of cash management. Cash management includes collecting from your accounts receivables, or from the bills that your clients owe you for services that you've already provided. Higher prices and a larger profit margin allows for more growth for your business.
One of the many things your potential customer thinks about when considering doing business with you is, "Will I receive value greater than the price that I'm going to pay?" There are two reasons people spend money:
- To get a desired result
- To solve an important problem
How well you solve that problem, or how much they want that desired result will dictate the price that they are willing to pay.
Some clients have said to me, "…but Ebong, if I'm the lowest price, maybe they'll come and buy from me, and then I can eventually charge them more." This never happens and never works. I'll give you a recent example.
Earlier this year, a personal finance app company announced they were going to start charging $3 a month for their app that was initially free. The app helps users save money and make better financial budgeting decisions. The level of negative complaints from consumers in response were astronomical. People were more upset about paying $3 a month, or $36 a year, for a tool that helped them save thousands of dollars every year.
The company believed if they charged for their app, their customers would see the value and pay. But no one wants to be surprised. The customers’ expectation is that it would be free, so they expected it to be free. When you change that expectation, people get angry.
Now let's apply this to your business.
Your customers have a lot of questions when you have lower prices than your competitors:
- Why is this person’s price so cheap in relation to the next competitor?
- Is this a new business?
- Do they have the requisite expertise necessary to do what I need to have done?
because it’s a safe bet.
Here’s another example:
If I had a luxury car for sale for $25,000 and the Kelly Blue Book stated the same car should be worth about $40,000, you would think something is wrong.
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Is there an engine in it? Does it have brakes? Does it have wheels? What am I missing? Is it stolen?
You know why? Mainly because it's not congruent to what I expect for the value I'm trying to receive. The same thing is happening to your business.
Here's a simple tip that you can use to check pricing. Research your nearest competitor’s prices. Match the price that they charge, and then provide more value. And value doesn't have to be in the form or a discount. Value can be in the form of additional services that doesn't cost more.
If you're a graphic designer and you provide design services to create a logo, maybe you could add additional revisions to the logo as a bonus. In reality, you may charge several hundred dollars extra for that, but say, "Look, for this particular package, I'll give you three revisions for free. If you want unlimited revisions, it's going to be double the price."
The bigger goal is being able to provide something that people want and value. Customers spend money for a desired result or to solve a problem. It’s almost never because of price. The successful competitors in your industry are charging more than you are because they understand this principle.
About Ebong Eka
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”
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