Of the million-and-one questions and answers out there regarding business start-ups, the one that seems most likely to slip past entrepreneurs is pricing.
“I hear it all the time,” says Erich Peter, director of training and technical assistance at the Union County Economic Development Corp (UCEDC) in Union. “People say ‘I don’t know how to price myself. I don’t want to scare somebody off.’”
So what new entrepreneurs tend to do is lowball their rates or throw prices around without any real understanding of what it takes to run — much less profit from — a business.
Peter will present “The Price is Right: The How-to’s of Pricing Your Products and Services for Marketing Success,” a free workshop on Wednesday, May 23, at 6 p.m. at the Lawrence Library. Call 908-527-1166 or visit www.ucedc.com.
UCEDC is a nonprofit economic development corporation based in Union that offers programs to help businesses statewide wend their way through the morass of start-up and growth. Peter joined UCEDC a little over three years ago after a stint as an entrepreneur himself.
Born and raised in New Jersey, Peter grew up in an extremely financially conservative household. His father, a mechanic for Sears for 35 years, and his mother, who worked part-time only after the kids were out of the house, were the risk-averse type, Peter says. Accordingly, when he went to college, Peter studied accounting at Rutgers, where he earned his bachelor’s in 1990.
Peter worked in accounting for a few years before entering the energy industry in the financial and managerial end. By 2002 he had been “bitten by the entrepreneurship bug” and bought a printing company with a partner. This was just before giants such as Staples and FedEx turned their attentions to printing services.
After almost six years Peter and his partner realized they would need to invest huge amounts of money in new equipment just to keep up with Staples and FedEx, so they shut down the business. Peter then started his own consulting firm in 2008, but barely after he hung out his shingle, UCEDC called with an offer.
UCEDC had just received a state grant to conduct training programs for startups and growing businesses. Peter had been a client of UCEDC’s when he was running his printing business, and his experience with (and exposure to) so many other business people made him a favorite to take over the office in charge of training. “This place has brought all my worlds together,” he says.
Consuming passions. “Being a business owner consumes your life,” Peter says. This is one of those truths about entrepreneurship that he says takes people by surprise. People also fail to realize how little of their time will go into doing the actual task they wanted to go into business to do in the first place.
“Say you like to cut hair,” Peter says. “You get into business only to find how little time you spend cutting hair. You’re doing the books, you’re doing the marketing. It’s not about cutting hair, it’s about running a business.”
And what often happens, Peter says, is that new entrepreneurs start getting thrown off kilter. They were not aware of the responsibilities it would take to run a business before diving in. And this type of unpreparedness spills into issues such as pricing, especially as it relates to how much they need to cover their expenses, including the most commonly overlooked one — themselves.
Pay yourself. A salary is not a luxury, but a lot of new business owners fail to consider their paychecks as part of the expenses. Peter says that by including a salary in the budget, entrepreneurs end up miscalculating how much money consistently needs to come into the business for it to survive and, eventually, grow.
Marketing and promotion are two other areas entrepreneurs fail to take into account. “Most marketing is reactionary,” Peter says. Business suddenly slows, so business owners crank up their marketing efforts. Then they get business and stop marketing, until things slow down again. In that kind of a cycle, business owners never build any consistency.
The hole. Without an understanding of what your business needs consistently, Peter says, business owners will always be treading water. And when it comes to how much money they actually bring in, pricing is usually the biggest problem.
“The most common blunder I see among entrepreneurs is that they try to make everything market-driven,” Peter says. In other words, they are basing their price structuring for goods and services on what their competitors are doing, not on what their own businesses need.
What often happens, Peter says, is that business owners take whatever work comes through the door, at low prices, because they are trying to stay busy. Soon enough, they realize they’re taking on a lot of work for not enough money. But now they’re afraid to increase their prices or rates.
“This is when people say ‘I don’t want to increase my prices, my customers are going to leave me. I’ve dug this hole,’” Peter says.
When it comes to product pricing, there are some cases in which you cannot directly compete. If Target, for example, can sell cereal for $2 a box, but you can’t even buy the same box from your supplier for anything less, you can’t undersell Target and stay in business.
In such cases, Peter suggests finding a niche — a way to differentiate your services or other areas so that your customers or clients are willing to pay your higher prices.
As far as getting out of the hole, the simple answer is, you have to charge more, Peter says.
And, yes, the fallout you fear might occur. But there are ways around this too. If you have a contract worker, for example, steering low-rate clients to this person could keep the client with your company, yet still free you from having to do the work at a lower rate.
Another idea is to raise your rates and wean your lower-scale clients and customers into your new price structure.
Some will come along for the ride, some will not. But you stand a better chance of keeping customers around if you gradually introduce them to new rates, rather than shocking them with a much higher price tag.
Overall, it is a matter of understanding more than what you’re worth, but also what is needed to make your business profitable. “Most people are overworked but they don’t know why,” Peter says. “People are concerned about being busy but not about being profitable. They don’t peel back the onion.”