You were tired of losing money. So, you took my advice and crunched the numbers. You added up your total costs, and divided them by number of widgets sold. You inflated your break-even for your desired profit level. Voila'. You've come up with a new selling price. And your new price is three times what your competitors are charging.
First of all, understand that the reason your price is three times higher than your competitors' is that they haven't crunched the numbers. They have no idea why they aren't making money. They are driving, at night, with the lights off...and they are heading toward the cliff.
If Everyone Jumped Off a Cliff
Imagine this scenario. Your 16-year-old daughter asks you if she can go to an all-night party at the lake. Everyone will be there, she pleads. You respond, using your mother's words, the words you vowed you would never repeat, "If everyone jumped off a 500 foot cliff, would you?" You are right. Just because everyone does something doesn't mean it's the right thing to do.
Once upon a time, in your industry, someone recognized a need, and satisfied it. Or delivered the solution to a problem. He was the first one in. He started the game and created the industry, your industry. It was a great idea; it was brand new, and it was going to SELL.
Once upon a time, Mr. First-One-In asked himself, "How much should I sell it for?" Most business owners are not good at crunching the numbers. So Mr. First-One-In pulled a price out of thin air. Yep. Did he add up all his costs of doing business and do a break-even analysis on the product or service? Nope. He considered a few of the hard costs that went into the item, and then inflated it. Willy nilly. Wild guess selling price. Pulled out of thin air. He forged ahead with that price, lost money, but was too busy to notice.
Then, the second person to jump into your industry called the first person. He assumed a fake voice, and asked, "How much do you charge?" And the second person charged just about what the first person charged. You see, he assumed that the first person knew what he was doing! After all, he was in this business already, and he MUST have created a selling price that would deliver a profit. He must have crunched the numbers. Right? Mr. Second-One-In thought he saved himself a lot of work and worry by copying the first person's selling price. He justified this approach by saying, "After all, I can't charge more than the 'going rate' - ie: what Mr. First-One-In is charging - or no one will buy from me."
Since then, every person who enters your industry calls those already in and establishes a selling price based primarily on what they are charging. If most small businesses stink, and they do, this is about as logical as going to an all-night beach party just because everyone will be there. It's the blind leading the blind, right off the cliff.
You wouldn't say yes to the all night lake party for your 16 year old. Don't say yes to an "Everyone's doing it" selling price. Both are BAD ideas.
Get clear on a realistic selling price. Base your price on your total costs of doing business, including generous compensation and benefits for you and your wonderful employees. You will discover that your realistic selling price is significantly higher than your 'blind' competitors. At this point you have two choices:
1. Learn how to market and sell at that price.
2. Take your ball and go home.
I recommend you go with number 1., because you can always default to number 2. Why not learn how to sell value instead of price? Why not become so much better than your competitors at what you do and how you do it, that your clients will be happy to pay your prices. We have gotten so used to poor customer service that, frankly, it isn't even difficult to be extraordinary. Be polite. Show up clean and on time and you will blow away most of your competitors.
If you charge the 'going rate,' you will DOOM your business. You'll take it straight off the cliff with everyone else's businesses.
Be better. Charge more. Stand your ground. Make more money.
Simple as that.
Bare Bones Biz Rule: Charge more than it costs.
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