Pricing your products and services is perhaps one of the trickiest things you have to do when you start your business or revamp your marketing strategy.
Although it is difficult to arrive at profitable price points, it is inarguably critical to get this step right. Getting your price right is the pillar on which business profits rests and now you know why you can't get it wrong. Here's how pricing your products low can cripple your business:
Low price, low profit margins: Although this one is obvious, it is still one of the most common mistakes entrepreneurs do when starting their business. "Going cheap" is the answer most small businesses give to their competitors in order to gain market share. Realize that lowering your price is not a smart way to do business because by design, it cuts your margins down considerably. Forced to operate on thin margins, you will have to sell more and more just to sustain your business—forget making a profit out of it.
It takes a long time to make money: Businesses that price their services and products high – backing it up by a host of things like superior product quality, an undefeatable Unique Selling Proposition, etc., -- have to sell much less in product volume thanks to high profit margins built into their high priced products. If you priced your product or service low, you will end up selling much more than your high-priced competitors do to make the same amount of revenue with same or more effort than they take.
Once cheap, always cheap: Once you set your prices and start doing business that way, it is certain that you will never be able to price yourself any different than at the price points you choose initially. When you do business for a while with your chosen prices, you are setting patterns that your customers and the industry at large get used to. You can't change your prices midway, unless you have strong reasons like product/service overhaul, a new USP, etc.
It dilutes your brand image: If given a choice, I would choose to sell an expensive product than a cheap one. Expensive immediately makes me think about a successful brand image. Obviously, good things in life come for a price and when you give something away for cheap, the image that product carries is sub-par or worthless.
It is difficult to sustain your business: When you sell products or service for a low price, expenses are barely met, salaries are often skipped, vendors and suppliers go unpaid for months together. You could end up with your overdrafts excessively drawn and banks threatening to close down on you. You don't want a situation like that, do you? Remember that cash flow is everything to help sustain a business and higher priced products go a long way to help you do just that.