How to tell whether your prices are too cheap

DETERMINING YOUR PRICES, and whether you’re selling yourself too cheap, is a critical element in the success of your business, and in your own success as well.

The EzyStartUp Course covers setting prices in some detail as there are many factors you need to consider and include in your prices to ensure you’re not just competitive — but that you’re also drawing a living wage.

There’s a theory that low prices attract more clients and that, in doing so, you’ll be able to earn more than if you had higher prices and only a few customers. This model does work, but it’s usually only in relation to big supermarkets or chain department stores. Take, for example, Woolies and Coles each trying to outdo each other with the cheapest bread and milk — and more recently, Bunnings and Masters who’ve gone head-to-head over the price of hardware items like paint.

But smaller retailers have rarely been able to compete with big ones, and it’s largely the reason why there are fewer independently owned retail shops now than there were 30 or 40 years ago. And gradually this mentality has started to seep into other areas of business, including the area of professional services.

Reasons why setting your prices cheap doesn’t work

Even though cheap prices will generally bring you more clients, there’s good reasons why having a lot of clients paying you very little is bad for business. Here’s a couple:

1. Lots of clients paying very little means you’ll work like crazy

If you’re going to outdo your competitors with low rates, then you’ll need to employ staff or find other contractors willing to subcontract the work from you for even lower prices, otherwise you’ll find yourself working like a crazy person in order to make ends meet.

I know there’s that old saying which goes something like, “If you find a job you love, you’ll never work a day in your life,” but I also know that living in a capitalist society means having to pay for stuff, and unfortunately, very few banks accept bags of love as a mortgage repayment.

It doesn’t matter how much you love what you do, you need to ensure you’re remunerated fairly for it. You may choose to set your prices lower to get those first few clients but you need to adjust them later as you become more established.

You may choose to set your prices lower to get those first few clients but you need to adjust them later as you become more established.

2. Cheap Seems “Cheap”

Everyone loves a bargain, but there’s a difference between something that is well priced and something that is plain cheap. If your prices are drastically cheaper than your nearest competitor – and that includes other small businesses and sole traders – and you can’t justify why (“I don’t have the same overheads because I work from home”), then people are going to wonder why.

Cheap rates reek of one of three things:

• you’re inexperienced
• you’re not very good at your job
• or your work is substandard, either because of one of the aforementioned reasons or because you simply don’t have the time/care/both.

None of those things are appealing to businesses looking to hire a contractor, and more often than not, most businesses will go with the slightly more expensive option.

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There are many things to consider when setting your prices, which is why we include it as a subject in our EzyStartUp Course. However, as a general rule of thumb, researching other businesses in your industry will help you to understand how much you can expect to earn, and should serve as a good starting off point for your business.

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