Throughout our coaching, we meet with many entrepreneurs navigating their way through the business world.
While on their journey, we help entrepreneurs and executives adopt best practices to deal with the competitive economy. This week, we’ll address three common pricing strategy mistakes many entrepreneurs make.
Now, plenty of people struggle with identifying mistakes, especially in the entrepreneurial world where a great deal of confidence is required. As John C. Maxwell once said, “A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” As an entrepreneur, mistakes are part of the game and growing your self-awareness is critical.
To keep your business profitable, you’re doing whatever it takes to stay afloat. The truth keeping entrepreneurs up at night is that your clients have plenty of options to serve their needs. It’s up to you to offer them the best price and stay competitive. But this leads many entrepreneurs into a semi-existential crisis: what is the real worth of my product to the world? What about my business as a whole?
When customers are your boss, you may tie up a great deal of self-worth in pricing your product or service. After all, for entrepreneurs, it’s personal! But it’s also important to realistically consider the problem from all angles. When it comes to setting a price for your product or service, avoid these three mistakes or you’ll no longer need to hang your shingle.
When establishing pricing for a product or service, many entrepreneurs don’t gather enough data to drive their price-setting decision.
It’s important to weigh all the factors involved in processing your product or service. Shipping costs, materials, and credit card charges add up quickly to strip you of profit. Don’t forget labor costs—not just for producing the product, but for promoting, advertising, and selling the product as well. Sales commissions and marketing costs also factor into your pricing strategy.
Gather and review market data as well: what does your competition charge? How much are customers and clients willing to pay? What’s the fair price in your market? Often, this information is readily available but requires legwork through data-gathering and analysis. This is well-worth the effort and investment because the data paints a clear picture of demand.
The other important datapoint to remember in your pricing strategy? The value of your time! Remember, your time comes at a cost, both professionally and personally. I’ve seen entrepreneurs run themselves ragged because they didn’t account for their own time and proper compensation. Your time is extremely valuable; don’t overlook it when you price out your product or service.
It’s important you consider your profit target and how to keep yourself liquid as you generate revenue. This is often where entrepreneurs fail to see the forest for the trees. They get so bogged down focusing on their immediate profit margin that they become short-sighted.
Ask yourself, what profit do you need to generate from the product to grow your business to the next level? If your profit margin is too small, your business will fail to thrive. It takes money to make money, so don’t forget to look at the long-term plan for investing in the growth of your business.
Entrepreneurs often think they’ll compensate for this gap later, once sales increase and a customer base is established. The reality is, later never comes.
Your long-term strategy will impact how you structure your payment schedule as well. To improve cashflow, you must collect enough upfront or early in the project to cover for your costs. Cashflow is vital to the long-term health of your business. Remember, if you borrow to fund a project, it often costs you more money in the long term.
What value can you add to your product or service that isn’t price-dependent? It’s common to focus only on offering the lowest-priced option out there. The cheaper-is-better myth is a common entrepreneurial-mindset leading to trouble. Always remember, customers and clients buy based on factors outside of price.
Look at the car industry, for example. If cost was the only factor, everyone would drive a Nissan Versa. But consumers don’t buy cars based only on price. They consider size, reliability, performance, brand status, style, color, and many other factors before they purchase. In fact, price is usually a much lower factor on the car-buyer’s value list.
When estimating value, consider:
Wondering how you get this information? Get out there and talk to your prospective clients and customers! Many entrepreneurs are so single-mindedly focused on innovation and product development, they fail to engage with their consumer base and get to know them.
Ask your customers about their problem. Listen to their concerns and what they value about the product or service you provide. Brainstorm ways to solve their concerns better than anyone else and include those methods in your value proposition. Encourage customers to confide in you because you know how to help them. Become their trusted advisor. When this happens, customers won’t think twice about paying more for your product or service.
If you’ve already made one (or more) of these mistakes, it’s not the end of the world. Mistakes are simply a chance to learn. Take the opportunity to steer your ship back on course. This week, set aside time to review your pricing policies. Consider your long-term growth and projections.
Focus on the value you’re bringing to customers and clients. How will your product or service improve their life? As an entrepreneur, your innovation skills and visioning are strong. Consider how to convey the worth of your product or service to the customer in your pricing strategy and you’ll keep them coming back for more.
To learn more ways to improve your business and your life, please visit the Wright Foundation. We’re proud to offer many of our lectures and courses for download at a special introductory price. Learn how to get ahead in business, build your relationships, and create the life you want to live!
Dr. Bob Wright is an internationally recognized visionary, educator, program developer, leadership and sales executive, best-selling author and speaker. He is a co-founder of Wright and the Wright Graduate University.
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The Wright Foundation for the Realization of Human Potential is a leadership institute located in Chicago, Illinois. Wright Living performative learning programs are integrated into the curriculum at Wright Graduate University.