Whether you are selling digital products, physical products, conference tickets or sponsorships, your net profit is largely dependent on your pricing strategy. But it’s a difficult thing to get right.
If you set your prices too low, you won’t make any profit whereas if you set them too high, you’ll drive customers away. Besides not generating as much revenue, setting your prices too low also has the negative effect of attracting more difficult customers.
Anyway I don’t have all the answers, but today I’ll do my best to provide you with some insight based on my own personal experiences.
Currently I sell physical products, digital products, event tickets and sponsorships but when it comes to pricing, the patterns are all very similar.
In the beginning when you don’t have many data points to work with, you’ll likely base your initial pricing on guesswork or extrapolations from comparable products. But the key is realizing that pricing is an iterative process.
You’re not going to get it right the first time and the sooner you find out your price is suboptimal, the sooner you can iterate and find your pricing sweet spot.
In my experience, it’s much harder to know whether you are priced too high, whereas you can usually tell when your prices are too low.
So today, I’m going to show you some obvious indicators that you’re shortchanging yourself on price.
You Receive A Large Number Of Unreasonable Demands
When I first launched my online store course back in 2011, I was terrified that I was charging too much money.
After all, I’d only been doing ecommerce for 4 years at that point and who was I to teach people about ecommerce when there were hundreds if not thousands of more qualified people out there?
As a result, I priced my course almost 50% cheaper than other online courses on the market. Not only that, but I offered an amazing bonus that no one else offered.
For only $299, you had lifetime access to my course and all updates including a lifetime of live weekly office hours sessions. And because I felt $299 was already on the high side, I also offered another tier at $199 which granted access to the course video repository without the live component.
Here was my rationale. By charging less money, people would be more forgiving and make my customer support burden more manageable. If I charged a higher price, customers would be more demanding and ask for more of my time.
But guess what? The complete opposite happened. The people on the cheaper plan kept complaining that they weren’t getting enough support even though I tried to answer their emails immediately (sometimes within minutes).
A small subset of these customers even demanded access to the webinars because they wanted to ask questions live WITHOUT paying for it! They also constantly complained about the lack of attention even though they opted for the cheaper plan.
While most of my problems were with the lower tier customers, a small number of my $299 customers also complained about how “nothing was working” even though they did not make any effort to do the actual work.
Anyway over the years, I’ve raised the price of my class on a regular basis and here’s what I’ve found. Every time I raise the price, the quality of my students goes up and my support load goes down WITHOUT a reduction in sales!
Compared to 2011, my students today are…
- Much more successful.
- Much more motivated to do the work.
- Much more likely to take action.
- Less likely to complain and more focused on making steady progress
The moral of the story is that if your paying customers are constantly making unreasonable demands and trying to extract every last dollar, then ironically you are probably priced too low. It doesn’t make intuitive sense but that’s what I’ve found.
You Feel Like You Are Running On A Hamster Wheel
Do you ever feel like you are working your butt off yet not seeing much profit? Are you moving a lot of product out the door with nothing to show for it? More often than not, you are shortchanging yourself on price.
This is why small business accounting is one of the MOST important aspects of running a business. You have to know your true cost of goods and your overhead before you start selling.
Here’s what sometimes annoys me. I often hear people spouting off their ecommerce revenue numbers like…
I made 7 figures in revenue last year… I generated 300K over the holidays…blah…blah
But how much of that was profit? I remember watching the tv show “The Profit” once and the featured business was doing 5 million in sales but only generating 60K in yearly profit.
If you don’t have your books straight, you won’t know whether your business is worth running and whether you aren’t charging enough.
At the very basic level, pricing begins with determining how much profit you need to generate to maintain a proper wage. It’s actually quite astounding how many people go into business without even considering how much money they need to make in order to make it a worthwhile investment.
Pricing starts with determining what revenue targets you want to hit based on the number of units you think you can sell. If you don’t believe that you can make your targets based on your current pricing, you either need to raise prices or find a new market to pursue altogether.
Your profit and revenue targets are usually determined by your operating expenses. Make sure you account for each and every one of your expenses when trying to determine your potential profit. If your projected revenue minus costs yields a satisfactory profit, then your pricing is probably at least in the proper ball park.
According to the Small Business Administration, the average small business makes between 10-15% profit before taxes. Taking the average profit of your industry into account, you can make a good guess as to what you need to charge.
My wife and I fell into the trap of pricing our products too low in the beginning. Our main problem was that we didn’t properly factor in all of the costs involved in selling our goods.
For example, we didn’t account for the high percentage of defective product we would be receiving nor did we account for fuel and packaging expenses to deliver our goods to the end customer.
We also didn’t properly calculate the “true” landed costs of our goods from China.
Related: I created a FREE online calculator that will help you determine your “true” landed costs of goods. It will also help you determine whether to ship by air or sea. Click here to check it out
While it was quite satisfying to see revenue and product moving out the doors, we basically worked our butts off for the first month and ended up just breaking even.
You Attract A Lot Of Cheap Customers
I don’t quite understand why this phenomenon occurs, but lower prices tend to attract lower quality customers. You would think that already rock bottom prices would discourage a customer from haggling with you, but the opposite is true.
Low-ball prices encourage customers to try and low ball you some more. It’s analogous to a situation that my friend was in recently when he tried to sell his house. He initially set the price on the low end so he could get a quick sale of his property.
What ended up happening was that he attracted many bargain hunting home buyers. After receiving a bunch of low ball offers, he ultimately decided to pull his property off the market and upped his price to eliminate the riffraff.
If you find yourself dealing with a high percentage of pain in the ass cheap customers who try to haggle with you at every step, then chances are you need to raise your prices.
You’ll have to experiment for a while, but once the cheap customers go away, you’ll know that your pricing is at least in the ballpark of what you should be charging.
Our phones used to ring off the hook back when we offered significantly below market prices on our linens. We’d get a ton of calls from people who wanted coupons or to haggle with us just for the sake of haggling.
In some cases, I didn’t even think that these people ever had the intention of buying anything to begin with.
It’s ironic, but raising prices for both my class and my online store stopped 90% of our customers from ever trying to negotiate on price again.
It’s not always easy to tell if your price is right, but you need to at least set the price at a minimum level to make it worth your time. It’s very easy to set your prices too low in the beginning when your business is just starting out.
So here’s my advice for people selling goods for the first time.
- Set your prices higher than you think you should – For some reason, we all tend to short change ourselves when it comes to pricing our goods and services
- Target the higher end clientele – Especially if you are a small business without a large support department, focus on the high end before the low.
- Fight the urge to please everyone – If a customer complains too much or tries to haggle with you, just return their money. In many cases, the mental energy just isn’t worth it.
Today whenever I launch something new, I think of what Elon Musk would do. With Tesla, he created an ultra premium product in the Model S and the Model X first BEFORE catering to the Model 3 customers:)
- How To Command Premium Prices For Your Small Business
- How To Find The Optimal Price To Charge For Your Products
- Pricing: Psychological Mind Games That Stores Play
photo credit: Funnie in her wheel