The 6 Warning signs that prices are too low and what to do about them!
Posted on 13th May 2022
Are you undercharging for the goods and services you sell?
For many small businesses it can be hard to tell. That’s especially the case if they’re in a niche industry or possibly a contractor.
With costs rising now it may be a good time to review your sales prices. If the sales price isn’t high enough then rising costs will have a big adverse effect leading to…..
- Lower profit margins.
- Lower bottom line profit.
- Worsening bank balance.
Despite the importance of pricing to a business it is easy to get the pricing strategy wrong.
In most cases businesses tend to undercharge.
Their prices are too low.
How could you tell if your prices are too low?
The following signs are good indicators that your prices are too low.
1 Nobody questions your quotes
Do lots of your prospective customers accept your quotes without….
asking any questions?
wanting a discount?
taking too much time to think about it?
It’s entirely possible they’re delighted by what you’re offering and see your price as fair. Equally any reservations they might have had to going ahead may have been swept away because you were recommended or by a guarantee which you offered.
BUT. IF this isn’t the case then the likely explanation (and why the customer places the order) is that your prices are too cheap.
Strategy : A quick reply to go ahead with no questions asked suggests there is probably scope to increase prices and charge more.
2 You’re run off your feet
IF you’re feeling that you’re being run off your feet then it’s almost certain that you’re working long hours. That means early mornings. Late nights. Weekends too. It happens day after day and week after week with little let up.
There might be too much work to do for you and your team, but it still needs to be done in order to generate much needed profit and cash.
The impact of working long hours is made worse if there’s constant juggling of tasks just to make sure deadlines aren’t missed and the work gets done.
This mix of stress and constantly working long hours tends to grind business owners down to a point where some are simply worn out.
The trouble is that there’s not enough money left over to employ someone to help free up your time.
Strategy : Recognise that something needs to change….increasing prices is one change that will start to generate cash – cash that can be used to bring in much needed extra resource.
3 You’re overbooked
Lots of sales enquiries and lots of new sales orders means business is booming. The diary starts filling up. The number of unfulfilled sales orders steadily increases. It starts to take longer and longer to follow up sales enquiries. That’s assuming of course that they’re all followed up.
All looks good. Except that you’re rapidly running out of capacity and there’s no room left for new higher paying and more profitable customers.
It takes time and money to increase capacity to meet all this demand. A manufacturing business will need new machinery and perhaps additional staff. A service business will need more staff.
Strategy : A more profitable strategy is first to raise prices – if the extra demand continues then the higher prices will generate the cash needed to buy the new machinery or recruit more staff.
4 Customers DON’T treat you as well as they should
The unfortunate reality is that when customers think they’re paying peanuts then they often take you, as the supplier, for granted.
They don’t see you as important to them. Nor do they see your time as valuable. They think it’s fine to mess you around.
They cancel meetings at the last minute or turn up late. They don’t do reasonable things that you ask of them. They ask for extra work to be done but don’t expect to pay for it. They generate more queries than most….and often expect an almost immediate reply. In short, they expect a very high level of service for which they’re nowhere near paying for.
Strategy : Increased prices will mean those customers who expect a very high level of service but without paying for it will probably go elsewhere. Your business will then be left with customers who pay a fair price for the service they receive and you will have a more profitable business as a result.
5 Your prices have been the same for two years or more
In most industries, prices increase each year. Even if it is just slightly. Leave your prices unchanged for too long and you’re not keeping up with the ‘market’ and you are loosing profit!
Strategy : Make sure you review and increase your prices at least once a year.
6) You’re charging less than the competition BUT giving much more value
This is a real double whammy….and in a bad way. You’re providing a better service or higher quality product than the competition but, you’re at best charging the same as everyone else.
Invariably it requires extra resource, and therefore cost, to provide a better service or higher quality. This extra cost needs to be reflected in the price charged. If not, you will end up making less money than your competitors even though what you’re giving your customers is better.
Strategy : If you truly believe that you’re better than your competitors then you need to make sure your price reflects that.
How can you increase prices and avoid undercharging?
Finding the pricing ‘sweet spot’ could take a little time. It’s a case of trial and error. Here are four possible pricing strategies which could help you take action….
- Across the board price rise : Simply increase your prices (whether by a certain percentage or fixed monetary amount) to everyone. This requires a bit of courage – particularly if the price rises are quite big.
- Salami price rise : Increase your prices to everyone but over time. Divide up (or salami slice) your customer base into small groups and then increase prices to one group at a time. One benefit of this approach is that, as you receive customer feedback, you can improve the process to get better results.
- Selective price rises : Increase some of your prices – maybe select to certain goods/services or to just certain customers. For example, if you initially just raise prices for prospective customers then you can see the results before you approach existing customers.
- Differential pricing : Use different prices (or rates) for different levels of service. The railway companies use this strategy all the time. Different price for peak or off peak. Different price for 1st class or standard. Different prices for open or closed tickets. Different prices for week or weekend travel.
IF you believe you are NOT charging enough then the important thing is to recognise it and then take action to increase prices.
Hopefully one of these pricing strategies will help.
We can help too.
We have helped numerous clients successfully increase their prices – in some cases it was by a lot. The price increases though changed everything. More profit. More cash. A happier and less stressed business owner working fewer hours.
If you think you might be undercharging and not sure what’s the best way forward then just get in touch. We’d love to hear from you. Call us on 0161 410 0020 or email email@example.com