Every Company Needs a Good Map

This is the second in a series of posts on the issue of setting prices too low.

Undercharging is a mistake that happens for many reasons:
·    Fear of losing sales
·    Desire to spread their beneficial product
·    Over-developed fear of greed
·    Lack of confidence in the product or service quality
·    Attempt to undercut opponents

In this post, I want to address the fear factor in price setting. This is a mjor problem for many business owners, founders, and salespeople. A big part is short-term thinking and a failure to communicate the value proposition for the product or service. The thinking goes like this:

"If I charge too much, then no one will buy what I am trying to sell."

The key here is that while this may be true, the key is the "too much" part. What is too much for a life preserver on a sinking ship? What is too much for a life preserver on dry land? The key is how much the item in question is needed, wanted, or valued.

The image to the right is from a contest that can be found here. I think that being afraid of one's own hair - Trichophobia - must be a very scary thing. Being afraid of your customers may be kind of like this.

This post is continued...

Need is only a part of the question. Since I went over needs a few weeks ago, I will not rehash that now. If you would like to read the posts where the Maslow Hierarchy was discussed in terms of selling please visit one of these links:

• Maslow Hierarchy Level 8: Transcendence Oct 19, 2007
• 7th Level Need: Self-Actualization Oct 18, 2007
• 6th Level Need: To Be Authentic - The Dove Campaign for Real Beauty Oct 17, 2007
• 5th Level Need: Knowledge and Understanding Oct 16, 2007
• 4th Level Need: Esteem Oct 11, 2007
• 3rd Level Master; Belonging and Love Oct 10, 2007
• Needs - After the Basics, Safety Oct 9, 2007
• Needs - More on "Do I need That?" Oct 8, 2007

It is not hard to over estimate the value of a product or service and that happens very frequently. That situation usually has a correction factor - no sales. This correction can be harsh and in some instances, people in denial, unrecognized.

For this topic, I think the best advice I received back in 1992 from Dr. Arnold Beckman, the inventor of the ph meter, and founder of Beckman Instruments. Dr. Beckman passed away a few years ago and Beckman Instruments is now Beckman Coulter (BEC). Dr. Beckman said that the number one reason more companies fail is that they forget to "Charge more than it costs." The trouble is that they forget to include the cost of all of the components or people that go into getting a product to market. (Who says scientists don't make great business people?)

If you only look at COGS (Cost of Goods Sold) on your income statement, you will miss 60 - 80% of the costs that need to be covered. Typically, for any product the cost of labor is 60% or more, marketing can be 5-10%, R&D should be 5% or more, and then there are the costs for accounting, sales, and management.

I suppose that his comment seems to simple, but you just have to look at the number of business failures and you see that many people are not getting the message. In his lesson, he said, "It is all well and good if you want to run a charity but you should let your investors know about it first. If you cannot sell the product at a price that covers every cost, then you will not be in business for very long."

If you are looking to grow a business that will last, that can pay its bills, and reward its investors, then you need to be certain that you can, "Charge more than it costs." Don't be afraid of losing sales as much as you should be afraid of losing your business. Don't start if you cannot run the race in good health. You will be miserable and struggle endlessly.

In my brief Internet search on this topic, I found a blog by Jim Kukral, where he addresses the topic of undercharging. How Do You Know When You're Undercharging For Your Expertise?  I think the best part was the image (shown here) he has there. If you struggle and are miserable why continue?

Don't be afraid to charge a fair price that covers your full costs or do something else. Also, seriously consider Jim's advice: If it isn't fun, then why are you doing it?