Research from CB Insights found that poor pricing strategies are one of the most common reasons why small businesses fail. When it comes to poor pricing, overcharging is only one aspect of the problem. Undercharging for goods or services can be just as damaging to a company.
Many cautious entrepreneurs choose to adopt a low pricing strategy in order to win business and gain market share. The problem, however, is that the market may be prepared to pay more than the entrepreneur is charging. When entrepreneurs don’t take advantage of the market’s willingness to open its collective wallet, the business suffers.
Of course, it’s not always easy to realize that your prices are too low, given the somewhat chaotic nature of starting and running a small business. For that reason, I’ve like to outline five warning signs that entrepreneurs should look out for. These red flags may signal that your prices are too low:
1. You Can’t Keep Up With the Demand for Your Services
A constant flow of customers is reassuring – but when the flow is so great that you can’t keep up (and maybe even have to turn customers away), there’s a problem.
Your inability to meet customer demands could be a sign that you need to expand your team. Here’s where the pricing problems come in: If your margins are so low that you can’t afford to hire more people to meet customer demands, then that means your prices are not as high as they should be. The best thing to do in this situation is raise your prices a bit, increase your profitability, and use some of that extra income to hire the people you need to scale up.
2. Your Profit Margins Are Comparatively Low and/or Shrinking
If your production costs are aligned with industry norms and you’re paying your staff a fair hourly wage, but your profit margins are still comparatively low and/or shrinking, then you may very well have a pricing problem.
Small businesses operate in a volatile marketplace. The cost of doing business and the perceived value of your goods/services can change dramatically in short periods of time. This, in turn, means that your prices can easily fall below market rates. If your profit margins are low but all other areas of the business are managed well, you may need to up your prices.
3. You Can’t Afford to Pay Your Employees the Going Rate
In the early days, you might be able to get away with supplementing substandard wages by offering free food, subsidized parties, and promises of future prosperity. This, you should know, is only an acceptable strategy in the short term. If you find that you still can’t afford to pay your employees a reasonable rate after the business has been up and running for some time, then something is not working. That something may very well be your prices.
4. Clients Accept Your Prices Without Haggling
There should always be some room for negotiation in your prices. If you find that customers are pretty much always willing to accept your initial rates without even trying haggle, that’s a bad sign. The fact that no one tries to negotiate your prices – completely bucking the human predilection for negotiation – suggests that your pricing may be set too low.
5. You Haven’t Raised Your Prices in a While
No matter what industry your company operates in, there’s a good chance that market forces will, every so often, cause dramatic pricing swings in all directions. You need to ensure that your pricing strategy accounts for the dynamic nature of the marketplace. Otherwise, there’s a strong chance that your prices may be too low (or too high).
So, if you do find your prices are too low, then you have an opportunity to raise your prices and, subsequently, your profits.
If you recognize any of these warning signs and determine that it’s time to raise your prices, remember that you need to be careful. Simply jacking up your prices could drive away customers, which is just as bad as – if not worse than – charging too little for your goods or services. You have to be smart about all facets of your pricing strategy, and that includes your plan for raising prices when necessary.