Great! You’ve made a sale!
There’s cash coming in, sales are up and you’re now more busy in the business. Sure, you're cutting profit a bit fine on this one, but the goal of a business is to make things that make people happy.
Right?
Having met with clients going through pricing decisions over the past few weeks it seems as important as ever to look at the costs of setting your prices too low.
1. You’ll go out of business.
When estimating the costs of supplying a customer, we always tend to leave out really important costs, whether they be GST, the costs of running the business or shareholder salary. Obviously these still need to be paid, which may mean your client/product with a low margin can turn into a loss making venture very quickly.
2. You’re buying time
Getting a deposit up front for services offered is often cited as a way to increase cashflow. But if you’re pricing your products too low you’re just buying time until the hard decisions start to come. It’s far better in the long run to make these decisions early, than to run up further debts in the business.
3. You’ll have happy, unprofitable customers
The best thing is a happy customer - they’ll be happy to see you, refer you new clients and you’ll enjoy dealing with them. But if they are unprofitable then you’re subsidising the relationship leading to you going out of business, or changing their prices later and possibly losing that goodwill.
So leave “loss leading” to the supermarkets, price to the level of value that you generate.
If you’re looking for help in pricing your offering, or any value council please get in touch