Opinion

However tempting underpricing might be, it pays to back your products

5 min read

26 June 2015

One of the biggest battles for pressurized SME’s during the recession years has been to get pricing right.

There has been heavy pressure from the government on “fair” pricing. There has also been heavy pressure from the consumer – who either genuinely cannot afford the goods, or has been so aware of their buying power they believe that they can get whatever they want at whatever price they want. 

Given these pressures, desperate to keep the work force in work and with sales hard to come by, it is an easy temptation to underprice. 

Most of us have squeezed our own supply chains in the same way but it has been a balancing act and all too easy to allow the squeeze on us to be greater than we can pass on and to slip into loss making situations. It is also all too easy for a business to fail to concentrate sufficiently on price. Poor communication between finance and sales, for example, can be disastrous.

Even in good market conditions, it is a proven fact that pricing is one of the biggest weaknesses in business. We are – on the whole – pretty strong to whizz around upping what we provide to customers, enhancing the customer package, adding value to our services. And, yet still, we struggle to charge for any of that. The moment we think about increasing price, we suddenly lose faith in our products and services and perceive our competitors as the best thing since sliced bread that we absolutely have to undercut. 

We are, first and foremost, scared of losing sales. Our sales people will be the first to exacerbate that, fighting tooth and nail against proposed price increases, as they see their commission endangered. As business owners, our guts fear barometer sky rockets; it hears the customers objections and rejects the idea of rises in costs emotionally. 

Read more from Jan Cavelle:

Having been in business for a good two decades and having made, it seems, most mistakes there are on the list at some time or another, this one is certainly no exception. It is extremely easy to bend to customer pressure to keep prices low. The result, however, is catastrophic if you get this wrong.

Most of all, obviously, if you get it really wrong, your nice successful business turns loss-making for a while. But less obvious at first, are the more insidious effects. 

Tipping just a bit wrong means you can’t pay your staff what they are worth, causing them to feel less motivated and possibly leave. It can mean that you have to be exceptionally lucky to get the pick of the crop when hiring offering less than attractive rates. With cuts made, there is less time to add the extra values that the customers have come to expect, so while your prices may not have risen, there is a huge danger of the quality of goods, service and certainly customer experience decreasing. 

Therein starts a vicious circle whereby customers start being more and more unhappy; staff start being more unhappy and you are looking at a reducing balance sheet and wondering what happened. 

The biggest irony of all is lost in all that – we forget that the majority of customers are a reasonable breed. Told honestly and transparently about the necessity of a price increase, and provided thereafter with the goods and services they want and expect, my experience is that they are happy to work with you. 

No business is sustainable without pricing right and sustainability is the true bottom line of business.