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01/18/2011

Pricing Mistakes That Many New Entrepreneurs Make

Trying to be the lowest price provider �

One of the most damaging beliefs in business is the idea that the lower price gets the highest volume. However the whole lower price equals higher volume idea, a fundamental law of economics, is for undifferentiated commodities, not your business.

Successful lowest-price strategies are unusual, and they usually take a lot of capital, resources and visibility. What works for Costco and Walmart doesn�t work for the corner store, independent restaurants, various service-oriented businesses and others.

Mixing your pricing message ...

Price is the most powerful marketing message you have. Do you think people don�t buy your work because it�s too expensive? But isn�t it worth it? Don�t you believe in it? It�s about positioning. How are you different from the others? Is what you sell better than the one across the street? Does your price say so?

Would you get a root canal from the cheapest dentist in town? Would you save money by buying two-day-old sushi? And why isn�t the cheapest-made car the most popular?

What would you rather have for dinner: a $1 hamburger or a $30 steak? A restaurant that has really good food and surprisingly low prices no longer exists. (Their profit margins were too thin; by refusing to change their low price policy they went out of business.) Do you think pricing had something to do with that?

Underestimating real costs ...

Businesses go under when they run out of money. The research on how they run out of money is confusing and ambiguous, and there are rarely single identifiable causes. They frequently run out of money because they underestimated real costs.

We talk a lot about gross margin in business analysis. That�s your selling price minus your direct costs. So when you buy that widget for $2 and sell it for $6, then the gross margin is $4, and your gross margin percent is 67-percent.

Unfortunately, focusing just on gross margin isn�t enough. Aside from the $2 you paid for that widget, there are all those other expenditures � including your rent, your payroll, your insurance, your electric and water bill, all of your marketing costs, and lots of hidden costs, plus the computers and software you�ll likely need in the future. We tend to forget this additional overhead �all the way to the business grave. You simply run out of money. So give your pricing considerations the time and study they deserve.



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