Tuesday, June 5, 2012

Charging the Right Price: The Single Most Important Rule of Business

Charging the Right Price.
Last week I read one of the most interesting articles I've come across in recent weeks on the Internet. It was about an issue that is often hard to accept, but unfortunately it’s concrete-like real: Entrepreneurs are very good at meeting challenges with optimism - but sometimes optimism isn’t exactly what their business really needs.

Entrepreneurs are often too optimistic about sales and too pessimistic on prices. I mean, they have an enviable enthusiasm to develop a business proposal, a great idea, wonderful, with excellent potential, but when the time comes to develop a pricing policy, they make the most common mistake of all: charging too little.

Businesses must be guided by numbers, not emotions.

The article made reference to two women, Carey and Julia, who had opened an entertainment center for children called Frolic, which offers classes, birthday parties, a boutique, coffee shop and a playground area, all with a solid and impressive atmosphere, located in New York.

Since its inception, Frolic had done very well: They have managed to sign up a good number of members, have always been ready to developing new offerings, had gotten lots of great publicity. For most eyes, all things looked remarkably well.

However, when they sat down to talk with their advisor - the author of the article which I’m referring to - and took a look and revise business numbers, they realized they weren’t producing enough money to even cover operating costs, ie they were losing money every week.

Even when the girls felt they were succeeding, the reality check didn’t back them up: They were losing money. The problem was obvious. They were having a good volume of customers but the money generated by those was not enough to cover even their own payrolls. Which was the problem? The wrong pricing policy.

The price war is not always the best option.

Even having a business proposal which was truly exemplary, differentiated and with enormous potential in the environment in which they decided to settle, Carey and Julia set their prices the way many novice entrepreneurs do: Charging a little less than their competition to attract more customers, and then start to build it up from that point up.

But their business wasn’t comparable to their competition’s. They had many attributes that added value to and differentiated it from the rest. None of their competitors had a facility with an atmosphere as exciting or a creative design space as Frolic’s. Carey and Julia could certainly charge more for their services.

Your client is the one who wants and can afford to pay the right price for your product.

Although the idea of ​​charging more for the services your company offers can frighten you a little bit and make you think you will even lose customers if you do, you might consider as well that your product offering is really worth it and, ultimately, you want to earn money and have a profitable business. Charging a fair and reasonable price that suits your product is always the best strategy, even if not all of your customers can afford it.

It’s ok to be excited because you’ve many clients and that things seem to be working fine, but if those many customers aren’t producing enough money to cover even your operating expenses, it's time to make some changes, and usually the first change is simply to collect the right price for your product.

Wanting to sell to everyone is fine, but you must necessarily focus your efforts on those customers who can afford to pay for your product the money you’re expecting to receive for it.

Your business reality is written in blue or red, and this is true, whether you insist on seeing it otherwise. If blue, phenomenal. If red, you have problems.

If you would like to read the original post written by Norm Brodsky, here you’ve the link to it The Single Most Important Rule of Business

And this one, is a link to a related post on my blog: Segmentation: All products for one or one for all?

What do you think? Have you ever felt on the “war price” tramp? What have you done?

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