Are Your Prices Too Low?

By Nellie AkalpSmall

Nothing has a bigger impact on your business’s sales, health, and bottom line than your pricing. Set prices too high and your products or services won’t sell. However, according to analyst firm McKinsey, lowball prices are a far more common problem for businesses. In fact, they’ve found that upwards of 80-90% of all poorly chosen prices are too low.

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It’s easy to understand why this phenomenon happens. Startups and small businesses have a habit of setting their prices low in order to attract customers. A brand new consultant might offer heavy discounts to win business and build a portfolio. Then, she never readjusts her prices back up to market rate. A web startup may keep a feature free for far too long, even though it’s clear that people are willing to pay for it.

These businesses face a similar future: they continue to win new customers, clients are happy, and their business is humming along busier than ever before. The problem is, it’s simply unsustainable. These entrepreneurs end up working as hard as they can just to stay afloat. In extreme cases, a business actually loses money with each new sale.

Are Your Prices Too Low?

Someone once told me, “If you set your prices once, they’re probably wrong.” That’s because with time, the cost of making a product and running your business typically increases. Maybe you’re a caterer and the price of milk has gone up over the past few years. A jewelry designer’s business is tied to the price of gold and silver. Costs for a consultant also rise, such as gas/travel, health insurance, contractors’ compensation, etc. All these rising costs need to be factored into your current pricing.


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In addition, if your initial business strategy was to undercut the competition based on pricing alone, your prices are too low. Unless you are a multinational corporation selling commodity products, then cost cannot be the only weapon you have to attract new clients. It’s time to pick a new strategy and raise your prices.

Get Confident: Know Your Value

What’s at the root of low prices? For the new business owner, it typically boils down to a lack of confidence. You charge the least amount on the market for fear that clients won’t pay more. Then, once those low rates are established, you worry what will happen when you try to raise them. If you have fallen into this trap, then you know that this approach results in long hours, barely enough revenue to get by, and clients who don’t particularly value your services.

At the end of the day, running a business is about charging the money you deserve for the value you or your products bring to customers. Lowball prices send the message that your services, products, and talents are worth less than others on the market. Think about it: what type of quality do you expect from a pair of $20 shoes versus $100 shoes? How about a $50 bottle of wine versus a $10 one?

Of course, everyone wants to keep their costs down, including your own customers and clients. But at the same time, they don’t want to hire an amateur to do important work or buy a low-quality product that may break in a few weeks. Your low prices may in fact be turning away those clients who are looking for quality professionals, and instead be attracting only bargain shopper clients … the ones who are looking to get a lot for a little.

How to Raise Your Prices

Maybe you’ve known for a while that you need to raise your prices, but haven’t been sure what the best way is to go about it. Here are a few tips for getting your business back to a healthy, sustainable level:

1. Sell based on value, not just price. Many small business owners never think about the lifetime value that their product or service offers. For example, a financial advisor isn’t just offering a one-hour session at X dollars an hour; she is helping people save thousands on their taxes for years to come. Likewise, a mobile app designer isn’t just building a new mobile site; he’s helping convert new customers and increase revenue by a healthy%. Do you think you can charge a premium for delivering that type of value? You bet you can.

Work on differentiating your services by illustrating the unique value you bring to the table. By competing on performance instead of purely price, you can frame the customer’s decision in terms of your company’s strengths.

2. Create tiered packages. If you’re worried about what kind of resistance you might face by raising your prices, you can ease into the waters by creating tiered packages that appeal to a broad range of customers. That’s what Apple attempted to do by introducing the iPhone 5c and iPhone 5s models.

For example, your current clients can keep their existing prices, but they won’t enjoy the same level of support, response time, or other deliverables as those customers opting for your premium packages. You’ll be surprised at just how many current clients will be more than happy to move up your pricing ladder in order to benefit from the better service and enhanced value.

3. Just do it. Sometimes the best way to determine if customers are willing to pay more is to simply raise your prices and see their reaction. If you’re selling products or have an online business, set up a landing page with higher prices. If your conversion rate doesn’t go down, you’re all set (you can even continue upping the price if needed).

If you are a service provider with longtime clients, you’ll need to offer more communication than simply changing a landing page. Let these clients know that you appreciate their business and need to enact new pricing. Using terms like “market rate” and “scheduled increase” helps justify the increase from a business standpoint. You can even let them know you’ve already increased your rates with all newer clients or mention how your skills and expertise have expanded over the years. Most important, keep your communication brief and don’t apologize for the pricing change.

4. Don’t worry about a lost sale or two. If no one has complained about your prices, it’s time to raise them. Let’s say that 100% of your current customers are happy with your current pricing — what happens if you were to raise your prices? Maybe only 80% will be happy and stick around at the higher rates, but you will have a more profitable and healthy business overall.

Don’t worry if you lose a sale or two. By raising your prices, you end up working with the kind of clients who understand the value of investing in higher-priced, higher-value solutions. In short, your pricing strategy can help you attract the right kind of customers to build a sustainable business for the long haul.

Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet, a legal document filing service, Nellie helps entrepreneurs start a businessincorporate, form an LLC or set up Sole Proprietorships (DBAs) for a new or existing business.