At some point in your small business career you will hit a moment when you realize that you really have a small business. It’s not a hobby, not a paying pastime, but a real business. That realization comes with a whole set of new learnings, one of which is that your business can be killed off with kindness.
Killing with Kindness
What I mean by that is because you haven’t been considering your business a business until now, you have probably done favors for friends and family, and maybe even given your products and services away for free to genuine customers in order to expand your customer base. You have reconciled these favors with terms that you have heard or learned, things like “loss leader,” “cost of doing business,” etc.
Actually, what you are doing is chipping away at the foundations of your business. For every “favor” you do and every under-priced job that you take on, you are damaging the credibility of your business and your ability to charge what you are actually worth.
The Danger of Favors
When I started my company it was extremely tempting to under-charge or at least price lower than I wanted just to try and win the business. I just wanted a customer, even if I didn’t really make much money from that one deal. Unfortunately, having done it once, it becomes an expectation, and then you are locked into a spiral with that client that you will find it very hard to extract yourself from.
What small businesses don’t realize is that the psychology of pricing is the reverse of what they think it is. When presented with two equal but unknown suppliers, decision makers will often base their choice on price. We all get that; however, as business people, what we don’t always realize is that the choice made is not to choose the lowest bid, but in fact, to choose the higher bid.
Okay, that seems counter-intuitive doesn’t it? Maybe, but it’s true.
When faced with equal choices from unknown suppliers, decision makers will usually choose the higher price because they associate higher price with higher quality. Note that I did say when all other things are equal, which means you have to ensure that your bid is highlighting all the great things you are offering for the price you are asking. Provided you have done that, don’t be frightened to ask for the price you really want, not just the one you think you can get.
Don’t Leave Money on the Table
I know over the past few years I have left money on the table. I’ve found this out after the fact when client representatives have moved on to another company and contacted me to do business again. They have told me: “You know, you could charge at least 30% more and still get our business.” What!!?? 30% more. 30% I left on the table. Now that will keep you awake at night.
So remember the next time you are making a quote, step back from it and ask yourself, is this what you really want to charge, or are you doing yourself and your business a disservice?
Image credit: Eastop
Excellent post, Simon. Something to monitor throughout a company’s growth, not just at the beginning, I’ve discovered. I remember when working in film trying to get a foothold in the market I thought I’d offer a slightly lower price than my ‘competitors’ (mentors, really). I think I recall that I mostly got the jobs where those who were far, far better than me were not available :)
When my colleagues pointed out I was undercutting their cost with my lower rate, I realized it was hurting our entire category of Directors, UPM’s, etc. Gee, I didn’t want to devalue my own admired colleagues & mentors, so I raised my rates and surprisingly got the rate I asked for. Lesson learned.
Good that you’re raising awareness on this, for everyone’s benefit!
Under-charging also has a tendency to build client relationships based on resentment and frustration, on the part of the provider. It’s very hard to give 110% and develop a good client relationship when you feel taken advantage of (even if it’s by your own doing)!
Excellent post. Adequately charging for your services improves the very work that you do. In fact, companies need to be willing to ‘fire’ unprofitable or under-profitable customers and pursue those who are more worthwhile.