I was recently contacted, through The Icehouse where I work as an Executive in Residence & Business Coach, to answer some questions for www.stuff.co.nz on pricing for start-ups.
Here are the questions that I was asked and my full answers.
1. Is there a temptation to price too low? What are the risks of just trying to undercut competition?
There is always a temptation to price too low, particularly when you’re a start-up and you think that the only way you can grab market share is to make it cheaper for people.
This is particularly evident in the service sector, where people look at ‘big company’ prices and realise that they can charge a lot less than big companies because they don’t have the overheads.
Pricing is always a short-term strategy & one of 2 things will happen over time. You will become a larger company and will start to encompass some of these overheads, which means that you can no longer sustain the lower prices, or someone with bigger pockets will drop their prices to match or beat yours… and no-one wins in this situation.
The reality is that if you have established a real ‘pain point’ and / or a ‘unique value proposition’ then customers will not choose you on price alone. They will come to you because you offer them something that they need or want and they will be prepared to pay for value.
The same applies for products & services.
2. Is there a temptation to price to overvalue services in the hope of making big returns?
What I do find is that people underestimate the costs of running a company in general. Often people miss out on the basic costs or don’t think to the future when the company grows and what additional costs that is likely to bring. As a consequence they tend to undervalue their products & services and price too low.
I also find that Kiwis, and particularly female entrepreneurs tend to undervalue their own time & experience. We work with many companies where we take them through an exercise to understand what value they truly offer and it almost always results in increasing prices.
That said, there are cases where people have over-valued their product or service and often a change in price will create significant increase in demand, that substantially affects the profitability of a company. This can work both with a price increase and a price decrease if the pricing is wrong. It’s about getting the right balance and understanding what value you offer, what margin it can support and the competitive nature of the industry that you are working within.
3. How do you accurately value your skills and services to meet the market when you’re starting out, so you don’t have to make big adjustments later.
We encourage every start-up to do an analysis of the competitive environment. This would include things such as pricing, features & benefits, positioning, quality, selection, service, reliability etc.
From here we work with frameworks that help you map out the environment and see where your niche is and what value is to the customer, and therefore what margins it can support.
Once a company has established their niche and their value, then pricing becomes an easier task.
4. How common a problem is it for start-ups to get the pricing wrong – and what are the implications of getting it wrong
It is very common for start-ups to get pricing wrong. The implications of this is that they may get stuck in a business where they are working long hours, are not reaping the rewards and can not afford to bring anyone else in to help them.
Additionally they risk losing customers when they put their prices up.
It does sometimes happen in reverse when the price has been too high and a small adjustment can significantly increase demand but in general I would say that it is easier to start higher and lower your prices than it is to put them up.
NEW – What’s the biggest product pricing mistake?
The biggest product or manufacturing pricing mistake that I see, particularly with artisan / handmade products, is not costing the product properly – either through missing out components of the product or not taking into account the labour time to make the product.
Artisan producers often neglect to consider the costs of using a commercial kitchen and their own labour costs. At the end of the say, when you scale, you will have to employ labour to undertake this task, so it needs to be built into the cost of the product.
Add this to trying to compete in the same pricing space as mass manufactured goods or goods from China and it’s a recipe for disaster.
COLD HARD FACT – Hand made / artisan adds value to the product and you need to recognise that value and charge accordingly. If you can’t find buyers who are prepared to pay that price, then you don’t have a product that is worthwhile making for sale.
I’m always happy to have a chat to start-ups about their pricing – just contact me.
Written by Debra Chantry (Principal | Business Coach) for stuff.co.nz.