Fix your pricing to fix your small business

utI had just started my brand new business endeavor. I was excited and afraid but I was fortunate enough to inherit a few small clients right out of the gate. The problem? The pricing structure was very competitive, geared to get more clients, however, when I applied my million dollars in sales test with it, I saw how I would still slave away at a lower personal income than if I stayed in the corporate world. I was stuck and actually depressed. My business dream was already in danger. What should I do?

My pricing was the problem. The math did not work at a million dollars in sales, which meant I did not have a worthwhile business, even if it grew aggressively. What if my prices were 25% higher? Now it made sense. However, fear settled in again. No one in their right mind would accept such an increase. I'm sure you can imagine the outcome since as I am writing these words we should be closing in at 3 million dollars in sales this year. Trust me, you need to review your pricing to fix your small business. Here are 3 reasons why:

1. Higher pricing forces you to focus on quality and uniqueness

Your pricing is the result of many factors: your costs, your market and competitors, your profit goals, etc. A higher price means a higher margin, which will obviously put pressure on your offer. A client will expect more from a supplier who charges more. Your higher price puts the focus on the quality offered.

Our meal packaging solution, made of pulped paper, is pretty unique and as soon as I increased pricing, I geared our pitch and marketing on this uniqueness. Clients would ask why we were more expensive than some aluminum equivalent and the discussion veered right away on the key benefits of our paper product. Which is exactly where you want to be, talking about why your offer is a better one. Pricing does that.

2. Higher pricing gives you a buffer for errors

If your pricing and margins are tight, you don't have room for mistakes. You will be making a lot of those, especially in the early stages. Actually, in all stages. New hires will be making mistakes, new lines or services will trigger mistakes, and you need a buffer for those. Higher prices allow for that.

As we grew, we learned to optimize our shipping costs. That higher margin was kind to us when a student team player erroneously shipped a $200 case across the country overnight which cost us $700. With the appropriate margins, we were able to absorb that cost. That mistake hurt us that month but did not kill us.

3. Higher pricing will fund your growth

In the same manner a rocket needs A LOT of fuel to launch, a business needs a lot of energy (money and time) to grow. Unless you have too much money to spare, or are chased by venture capitalists, most of your profits generated will have to be thrown back into the business to fuel its continued growth. Higher pricing will allow for that growth, but tight pricing will not.

As we were acquiring new clients at the higher pricing, the extra cash generated allowed for reinvestment in hiring earlier than planned, expansion into a new territory, etc. Had I NOT touched our pricing, this would have been impossible. Also, as we finally went for some traditional financing with banks, the margins were key in securing these funds. So higher pricing sets the stage for both money to reinvest AND becoming attractive for future lenders and investors.

My million dollars in sales test had shown how my original pricing would not allow for a successful business model.  Although increasing your pricing seems counterintuitive, it is a crucial move to fix your business. It will force you and your team to focus on quality and uniqueness, give you some buffer for errors as you grow and finally fund your growth with the extra cash generated.

If you were to improve your pricing, what quality and uniqueness would you have to focus on?

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