Better to Be More Expensive When in Doubt - Why You Shouldn't Set Your Prices Too Low
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| Photo by Houcine Ncib on Unsplash |
But in this article, I'll explain why you shouldn't set your prices too low.
I describe my own experiences, give examples, and list tips.
Why You Shouldn't Set Your Prices Too Low
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| Better to Be More Expensive When in Doubt - Why You Shouldn't Set Your Prices Too Low |
Defining prices is not that easy. Here you have to consider some factors that influence the price. These include competition, costs, profit margin, and more.
But there are good reasons to set the price of your products or services higher or to increase the prices again and again. Factors such as inflation, your hourly wages, rising employee costs, expenses for outsourcing, more expensive materials, and more ensure that prices have to rise too.
But other reasons can also mean that prices should be raised. This can increase demand and if demand is greater than supply, then it is worth raising prices. Some people also gain such a good reputation that they can choose their customers, which also enables higher prices.
The bottom line is that price increases ensure that your own business is healthier.
If in Doubt, Better to Be More Expensive
But many self-employed are afraid of losing customers to competitors. That is why they prefer to set their prices very low and shy away from raising them. This is understandable to a certain extent, because of course some existing customers, but also potential customers, will go to the competition. Still, it's often a good idea to get more expensive anyway.
When I still had customers, of course, I also raised the prices. I've had good experiences with it, even if I had concerns beforehand. Only a few customers said anything negative about it and none of them left me.
Getting more expensive is a great way to become more profitable. It usually pays off in a better hourly wage, which makes it possible to have more free time and/or to seize new business opportunities. In addition, with higher prices, it is also the case that you still have the opportunity to give discounts or run special promotions than if you are already in the basement with the price.
But you have to differentiate between 2 different customer relationships.
Prices for 1:1 Customer Relationships
On the one hand, we have the classic customer <-> service provider relationship here. Commissioned work falls into this category. When you work, it's always for one customer and not for several at the same time.
In my experience, it is particularly important not to set the prices too low here. This is simply since one's working hours are limited and higher prices usually have a very direct impact on higher hourly wages. In addition, with higher prices you have more time for individual orders, you can deliver better quality and at the same time reduce your stress.
But of course, I am also aware that this is not so easy, especially with start-ups. In the beginning, you are happy if you win customers at all. Nevertheless, one should try not to participate in price dumping right from the start. Special offers, additional services, and more can help ensure that the bottom line is better priced right from the start.
Prices for 1:n Customer Relationships
The other possibility is the 1: n customer relationship. This means that you don't work directly for customers, but create products and the like that can be sold to many customers.
A blog is such a 1: n business model, just like a book. But products that can be bought also fall into this category. The advantage here is that the effort is more or less independent of the number of customers. If I write an eBook, the effort is the same, regardless of whether I sell 100 or 10,000 copies of it.
That's why it's tempting to set the price lower here so that you have more customers. But if you take a closer look, then here too it is usually the case that higher prices are more lucrative.
I sell my eBook for 27 euros gross, which is quite a lot for an eBook. For example, if I sell 1,000 of them, the invoice looks like this:
1,000 pieces x 27 euros = 27,000 euros in sales
If, on the other hand, I were only to sell it e.g. 10 euros, then I would certainly sell more, but the turnover would probably still be lower:
2,000 pieces x 10 euros = 20,000 euros in sales
That's simply because it's a pretty small niche. It may look different in other subject areas. Here you have to analyze the market, as well as the competition. You should also test a lot, for example with limited special offers.
But the increasing number of customers has other disadvantages that should not be underestimated. For example, the support effort increases, which can mean that you have to invest a lot more time in it and the bottom line is that the hourly wage drops.
How Strong is Customer Loyalty?
The strength of customer loyalty is an important factor when it comes to increasing prices. Simply put, if a competitor also has a shop next door, then customers change faster than if you are the only shop of this type in town. Then it is often easier to increase prices without losing customers.
You don't change your accountant/tax advisor so quickly, because a close relationship is built up here and you usually don't want to deal with it any more than is necessary. Here you are happy when you have a service provider with whom you are satisfied. On the other hand, you can quickly refuel at another petrol station in town when the previous one is a few cents more expensive.
It's often the same online. In a narrow niche, there are usually fewer competitors and so it is often easier to set or increase prices higher.
Uniqueness is also important. Special products or services ensure that comparability is not so easy. In contrast, many businesses only differ from the competition in terms of price and that is not a good thing. The more similar and comparable you are to the competition, the more important the price is and the easier it is for customers to change.
It Pays Off Despite the Loss of Customers!
Price increases often go hand in hand with the loss of customers, which worries many self-employed people. Nevertheless, it can be worthwhile, because the bottom line is not the number of customers, but what your hourly wage looks like. Even a drop in profit can be okay.
In this example, you invest 4 hours of work per customer.
With 100 customers and a turnover per customer of 100 euros, the invoice is as follows:
100 customers x 100 euros in sales = 10,000 euros in sales
The gross hourly wage is thus 25 euros.
If you increase the price now, there will probably be a few customers who will leave. However, this only shows up to a limited extent in the invoice:
90 customers x 110 euros in sales = 9,900 euros in sales
However, the own gross hourly wage looks far more positive, which is now 27.50 euros, despite the lower total profit. The higher hourly wage provides more free time or offers opportunities to implement new business ideas.
Depending on the business (degree of customer loyalty), a price increase can also result in higher sales and thus an even better hourly wage. You have to calculate this individually for your own business and also test it on individual customers.
You should always keep in mind that sales are not always profitable. This means that you should also consider the costs here. However, if you raise the prices and thereby decrease the number of customers, the costs (administration, employees, material ...) usually also decrease, which is also a positive factor on the bottom line.
What Should You Watch Out for in the Event of a Price Increase?
If you increase your prices, you should above all make sure that you communicate this well to the customer. Getting a price increase across is half the battle. For example, you could offer a transitional discount for regular customers.
But you can, for example, also introduce an additional service that might make the overall package look even cheaper. It is not for nothing that many manufacturers offer bundles that bring a win/win situation. The customer feels (and usually also in real terms) gets more for his money, the seller has more sales, which has a positive effect on the profit.
The bottom line is, of course, that it has to pay off, but there are still some ways to “pack well” such as a price increase.
More Customers or More Lucrative Customers?
In the end, that brings me to a topic that I keep seeing in the self-employed.
There are 2 ways to increase your income. Either you win more customers or you increase the income per customer. Of course, you can also combine these two ways.
Depending on the business, one option is better than the other. More customers are more useful in 1: n customer relationships, as I don't work for individual customers here. The example with the eBook fits here, then of course I'm happy if 2,000 customers buy my eBook instead of 1,000.
The second possibility, i.e. increasing the income per customer, makes more sense with 1: 1 customer relationships, since you are limited in how many customers you can have. The customer lifetime value is an important point here. The more you earn with a customer, as long as he is a customer, the better.
Again and again, I see self-employed people who “pull” all kinds of customers. Some of them (especially the small ones) hardly bring any profit, but they cost a lot of time and nerves. It would therefore make more sense to concentrate on fewer, but more lucrative customers. In such a case, a price increase can be an indirect “customer cleansing measure” that has a positive effect.
It should be noted that it makes more economic sense to keep existing customers than to win new ones. That is why customer loyalty is such an important factor.
eBook Experiences
I found it difficult to set prices myself in my self-employment. I always have to fight against the feeling that I prefer to make it cheaper so that more customers will buy it.
I think the 27 euros for my niche page structure e-book are already decent. But it's a narrow niche with little competition. I also have a good reputation. Some people believe that I should offer it even more expensive. Maybe that's right, but I'm so completely satisfied.
On the other hand, I would certainly offer other eBooks cheaper, as they appeal to a different target group and bring a different “promise”. The niche page-building e-book makes money for readers as it shows them how to make money online. Other eBooks have a different focus that has nothing to do with making money. Many potential buyers are not ready to spend that much money.
Other criteria also play a role in some cases. If you want to sell your eBook on Amazon, for example, you have to pay attention to the author's fee. At final prices between EUR 2.99 and EUR 9.99 for an eBook, 70% of the net price is paid out. However, if the price of the eBook is lower or higher, it is only 35%.
In this case, you would have less profit with a 15 Euro eBook than with a price of 9.99 Euro. Such factors can naturally occur depending on the industry and should be taken into account.
Conclusion
“If in doubt, rather more expensive” is a principle that is initially difficult to digest for many self-employed people, but it is usually a better approach than entering into price dumping.
What experiences have you had when setting your prices?
How do you deal with price increases?
Related Video: Better to Be More Expensive When in Doubt - Why You Shouldn't Set Your Prices Too Low
Tags: Business, Business Models, Customer Acquisition, Self Employed,
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