You’ve heard the story about the guy who meets a girl in a bar, takes her back to his room and wakes up in a bathtub minus a kidney.

It really happened, right?  To your third cousin’s friend.  Or was it your friend’s third cousin?

Nope.  It never happened.  That is a (very popular) urban legend.

Business has urban legends too.  Unfortunately, they’re not as harmless as retelling your third cousin’s friend’s cousin’s story.

Debunking the top 3 Small Business Pricing Urban Legends

Pricing Urban Legend #1 – You can set your prices using your competitor’s prices.

Alternate Title: All the cool kids are doing it.

If I had a nickel for every time I heard this one, I’d already own that island in the Caymans.  Let me give you just a few reasons why this could kill your bottom line.

  • Do you know how much profit (if any) that your competitor is making?  Why would you blindly follow someone when you don’t even know where they’re going?
  • Are your products or services exactly the same?  That’s about as likely as sighting Big Foot in your backyard.  Those differences need to be accurately reflected in your price.
  • How does your expense structure, including the cost of capital, compare to your competitors?  Don’t know?  Then how can you know their price will work for you?

Pricing Urban Legend #2 – Just set your prices lower than everyone else.

Alternate Title: You had to hire a prom date.

Is your business product so lame or your service so crappy that you have to pay people to buy it?  If you’re undercutting everyone’s price, then you’re losing money.  When you knowingly offer a product or service at a price that costs you money, you are paying people to take your product or use your service.

When I point this out, I’m often told, “We’ll just make it up in volume.”  I’m going to let you in on a little secret.  If you’re losing money when you sell one hundred of something, you’re going to lose a whole lot more money if you sell one hundred thousand of something.

Pricing Urban Legend #3 – Charge what feels right.

Alternate Title: If it feels good, then do it and forget the consequences.

While I would never suggest that you charge a price that feels horribly wrong, how exactly does “feels right” translate into a profit?  How would you respond to a potential client if they told you that they didn’t need your services because they could just “do what feels right”?

I’m betting you could respond with twenty reasons why just going with the flow would have disastrous consequences.  Pricing is no different.  You can’t get the answer through osmosis or even a Vulcan mind meld.  If feelings were enough to create and run a successful business, all of the guests on Jerry Springer would be billionaires.

Final Thoughts

I know giving up these urban legends may be hard.  Even though you know it’s not true, don’t you still just itch to tell the kidney story?  Which one are you struggling to let go? Do you have another business-related urban legend to share?