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Get your prices right.

The thoughts of Richard Osborne on many subjects over the years.

Get your prices right.

When a business starts out and you go for that all so daunting meeting with your business banking account manager one of the first questions, after “do you want a loan” is usually, “what is your unique selling point”. And this can be the stumbling point for many a company.

A common mistake so many entrepreneurs make when they start their own company is to set their prices too low in the hope that a low price will attract new customers and they label this as a good USP.

In reality, what this actually does is attract the wrong kind of customer, the kind of high maintenance customer who shops on price alone and drains the supplier for every drop of blood they can get out of them.

What the entrepreneur should be doing is focusing on providing a quality service or product at a price that reflects that quality. This enables you to filter out the chaff from quality clients who you really should be concentrating your efforts and enthusiasm on. Someone who is prepared to spend sensible money on a quality product is a much better value customer than someone who haggles you down to the last penny at cost price.

And to be honest, would you not get more satisfaction if you could spend more time engaging with and helping the customers who truly value your services rather than those who are going to be beating you down on prices every day.

This is a regular hot topic on the UK Business Forums (www.ukbusinessforums.co.uk) where new business owners pop online and ask what the other members feel is a correct price to charge for their new product or service.

I recently spent some time with an IT support and computer supply company where the MD had no time to focus on growing his company as he was always running around dealing with customers all over the county. His profit margins were practically non-existent, so even if he wanted to he couldn’t afford to expand his business.

He had to finish our meeting early because he had to run out and sort out a broadband connection at one of his clients homes. I asked him how much he was going charge, and he replied £10 plus VAT. Taking into account the 30 minute drive there and about an hour on site, followed by a 30 minute drive back, that worked out a whopping £5 per hour charge, not including petrol. It’s no wonder he is making no money, and his excuse was that he didn’t feel his clients would pay any more.

Maybe some of his existing clients wouldn’t, but I responded with the other argument. Find some clients who would pay more. I, for example, would think of nothing about paying £70-80 for an engineer to come to our site and fix our office broadband connection if it ever went offline. My business relies on the Internet and it costs me more than that in lost business if I’m offline for an hour.

I’m not an exception either; I am a typical business client who realises the true value of a quality service from a professional. This is what small business owners should be focusing on, attracting the right kind of client and then once you have them look after them.

It takes courage to be bold enough to set your prices at what you really should be charging, and it will go against every instinct in your body saying “I need every order I can get”, but the realism is that you don’t need every order – you just need the good quality orders. The added bonus is that it puts true value into your service, a quality value that will reflect well when approaching potential clients. I use an example of this when I made the mistake of being too cheap myself.

I was once introduced to a large pharmaceutical company to do a contract as one of the board members at the company was a close friend who had opened the door for me. The deal was as good as mine, so I did my quote making what I thought was an OK profit but not too expensive as I really wanted this order. I was making £5,000 profit. I lost the order to a large blue chip corporate company who went in £19,000 more expensive than me!

When I asked my friend why I lost the order he explained it was simply because I was too cheap. The rest of the board was concerned that I would not have been able to provide the quality of service they wanted because I was so much cheaper than the other price. If I had been just £5,000 cheaper then the order would have been mine, and I would have made an extra £9,000 more profit on that order!

Although an extreme but very true example, the same applies on a much smaller scale. If you are running around trying to service too many customers who are not paying enough, give serious thought to raising your prices and go after a better quality of client. It is better in business to have less clients paying sensible rates and making a sustainable profit, than having hundreds of customers paying low fees and you make a loss.

You may even be surprised to find that most of your clients may actually be happy to pay you a higher fee. I know I sent this IT guys invoice back to him for my laptop repair and told him to double it! I want him to still be in business a year from now looking after my own office network.

The article may be freely distributed and copied subject on the condition that credit is given to myself with a link through to www.ozzy.co.uk

Comments (4)

  1. Jan 23, 2008

    This is such a great post Ozzy – spot on!
    I wince when I read about others wanting to be the cheapest and offering customers nothing else in the way of quality, service, branding etc.
    You should post this on UKBF!

  2. Jan 25, 2008

    Great post, but even the “great” businesses canforget that competing on price is a mistake, just look at Starbucks and it’s recent introduction of $1 coffee.

  3. Jan 27, 2008

    Awesome post Ozzy, it makes a lot of sense. Sense which most people do not realise when starting out. The big question of how much do I charge is still one of the scariest I think for a start-up.

    The big “What If”…

  4. Mar 6, 2008

    100% true Ozzy. I just read a book called the 4 hour workweek and a central premise is turning the tables and letting some customers go. It’s always the customers that pay the lowest that cost you the most time.