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Business owners must get pricing right

By Glenn Burkins
Glenn Burkins is editor and publisher of Qcitymetro.com, an online news site targeting CharlotteĀ’s African American community. He is a former Wall Street Journal reporter and Charlotte Observer business editor.

Let’s face it; many of us deal with issues related to self-esteem, and sometimes those issues play out in how we run our small businesses.

A friend called last week to say that a Fortune 500 company had inquired about contracting his services. Within minutes of emailing his proposal, he said, his contact called back to say his bid was not too high but too low.

Her advice: Double the asking price.

I immediately saw myself in that story.

A few weeks earlier, one of my own customers had called wanting to know the price to upgrade an existing contract. My first instinct was to say zero, that I would do the upgrade for free. But after a brief recline on my own business psychiatric couch, I emailed the upgrade price – which was snapped up without discussion.

How foolish it would have been had I denied myself some much-needed revenue.

Mike O’Malley, who provides business mentoring for the Service Corp of Retired Executives (SCORE) in Fairfield County, Conn., said he sees this all the time, especially with new entrepreneurs, and especially when it comes to pricing.

Because new business owners have not established themselves, he said, they sometimes feel as if they are imposters, undeserving of the higher pricing their more established competitors demand.

“Most entrepreneurs who are starting out, their self-esteem is being tested,” he said. “We tend to look at people who have done it as being more valid.”

O’Malley said this “knee-jerk thought process” can be especially pernicious for people who go into business already suffering with self-esteem issues.

I asked O’Malley and others whether this problem might be more acute among women and ethnic minorities – groups that might go into business expecting, based on economic and social history, to be at a competitive disadvantage. None said he saw a connection. (For the record, I’m still not convinced. As a black male, history has taught me to anticipate challenges others simply won’t face, and I often wonder how that history affects my thinking and decision making.)

Whatever our individual hang-ups, O’Malley said it’s vital that small business owners get pricing right; it’s one of the most crucial early decisions a small business owner will make.

Not every business owner who undervalues a product or service is suffering low self-esteem, of course. In some cases, O’Malley said, the culprit is faulty thinking – the mistaken belief that a lower price will lead to more business.

“That’s definitely a fallacy,” said O’Malley, who earned his entrepreneurial stripes in the clothing industry. “It does happen, but it’s not something that’s highly predictable and not encouraged at all.

“Every transaction should have a profit associated with the transaction,” he added. “If on each individual transaction you’re not making money, you’re not going to make it up on volume. That just does not work.”

As a small business mentor, O’Malley said one of the first questions he asks aspiring entrepreneurs is why someone would buy his or her product or service above a competitor’s. A cheaper price, he said, is never a good answer.

Instead of racing to cut pricing, O’Malley said, business owners who are just starting out should look to compete based on superior service. Because they are smaller, more nimble and have fewer clients, he said, startups can often offer a level of service and build relationships that bigger firms simply can’t.

As for building self-confidence, O’Malley said longevity typically will take care of that. The trick, he said, is to avoid under-pricing in those crucial early years.

“If you start at a lower price, it’s very difficult to raise your pricing,” he said. “Once you are into your market…it is nearly impossible, so if you are going to err, err on the high side.”

Glenn Burkins is editor and publisher of Qcitymetro.com, a news site for Charlotte’s African-American community. He is a former Wall Street Journal reporter and Observer business editor.
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