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Blog posts tagged making a profit

Pitching Your Prices

November 19, 2009 by Adam Ewart

I’m stuck in a Premier Inn in Oxfordshire for the third day… Three more to go… M&S biscuits from the Simply Food outlet at the BP garage are starting to take their toll and having to abstain from the internet is leaving me itchy. Why? Because Premier Inn thinks £12 per day is a fair price for internet access. I disagree. Why am I buying expensive M&S biscuits? Because I’m bored and they’re nice.

The hotel is primarily used by business people. The room rate, at about £60 a night, is fair and everything else is fine (apart from housekeeping popping in while I was in bed). But their internet access is extremely overpriced.

In the end I had to cave in. I don’t mind buying the M&S biscuits, because they’re a treat, but being forced to pay that much for internet for one day left me feeling a little bit cheated. I won’t be doing it again.

It got me thinking: how small businesses pitch their prices is crucial. A lot of small start-ups set their prices too high and never get off the ground as a result, while a scarily large amount of others believe their only way to compete is on price and from day one their margins are so low they get trapped and never make a profit.

Over the past few years in the various businesses I’ve had experience of both. So how do you know what price is right? Test, test and test again. Just because the price seems right to you on your calculator at home doesn’t mean your customers will agree.

Cheap isn’t always the answer

At the minute, other owners I know are constantly telling me how their businesses are struggling, as they regale tales of half-price sales and the like. For me, the most important figure in any business is its gross margin. Sales mean bigger turnover yet smaller margin, so as a rule I’m not a terribly big fan of sales.

But it got me thinking, although we’re doing perfectly fine during the recession with some sort of sale – could we do better?

Not wanting to slash prices on Karacha.com, my online music instrument shop, I decided to carry out a little experiment. I sent out some of our sale products under a different name at sale prices. I wanted to see if people would buy solely on price.

Every week or so I adjusted the price to see what effect it had. At first, the weeks went by with no difference and no real sales, but then I hit a particular price at which people went nuts for one product and we sold a lot. Slight problem: the price we reached was horrendously low, no profit and no point. Sale Over? Not quite.

At the same time I was doing exactly the same experiment with another product, but things turned out differently. I thought we might have excess stock of a particular item, so I sold some at £20 off, but unlike the first experiment where £20 made no difference, sales of this second product went from one or two per day to 10-20. Quick as you like this offer has been applied across all of Karacha and it looks like every bit of excess will be sold by Christmas at a tidy profit.

This shows that what’s right for one product might not be right for all and it’s worth giving your customers options and seeing how they react.

My advice when starting out is test, test and test some more, but always go for slightly higher prices, because next week, month or year you can discount if necessary. Having to increase prices can lose you customers.

If your business genuinely brings something new to the table, build good margins into your prices, have the confidence in yourself and your products, if you do, then your customers will.

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