How to Avoid the Temptation to Undercharge

Undercharging for your products or services is a rampant problem among entrepreneurs. You're probably doing it, and you’re hardly alone. But correcting this bad habit can be imperative to long-term success.

When pricing, you must focus on the value your product brings to customers; otherwise, you’ll find yourself on a difficult path with a tight budget to satisfy customers.

Why Founders Undercharge

Entrepreneurs undercharge for three main reasons. First and foremost, no one likes to hear “no.” With a low price, they hope to increase the odds that more customers will buy in.

Second, they aim to price themselves competitively with other businesses. This isn’t possible for most entrepreneurs, though: A 10-year-old company with thousands of employees will have a more refined production process or service than a startup that’s just getting started. However, startups can provide an exemplary concierge service given that they have a much smaller number of customers.

This leads into the last reason for undercharging: idealism. A lot of entrepreneurs want to democratize the industry they’re working in to make it free and fair for all. Unfortunately, it's not always possible to build a product better and cheaper than competitors. By trying to ease the pressure on a customer’s wallet, they could be affecting their own ability to provide a high-quality product. You'll usually need to choose one type of offering in order to be successful.

How Undercharging Kills Your Company

Undercharging can profoundly affect your businesses: It’s easy to slip into a negative cycle that's hard to break. It starts by changing the type of audience you attract. If the average individual can afford your product, then you might attract a lot of them and end up focusing on consumers. Large businesses might assume your product is not designed to solve their problems and self-select out.

If your audience changes, then so will your approach to selling. Ads and referrals work great for individual consumers, but appealing to Fortune 500 companies often requires long-term relationships with company leaders.

Instead of worrying about how much your customer wants to spend, think about how you will help your customer be more successful.

Undercharging will also alter how your product is built. If consumers are your primary users, they’ll expect to purchase and use your product or service without much hassle. On the other hand, a large company investing a considerable sum in your business will expect an onboarding process. That may mean software integrations and training so that users can understand the nuances of your product or service.

And if your product experiences an outage or bug, then your customer support will also need to properly adapt to the audience. Tech-native consumers may forgive hang-ups, but major companies might expect 99.9% uptime and have penalties if you fall short.

The way undercharging ripples through a business can be significant. All of these changes—to your audience, sales approaches, product construction and customer support—can be negated if you set a more appropriate price from the start.

4 Tactics to Avoid Undercharging

I’ve experienced firsthand how undercharging can influence a company’s destiny. At my previous company, we decided to charge $10 per month for an unlimited text messaging product.

Although the product was designed for businesses, we found most of our customers were individual people texting their friends. They flooded our support channels with complaints about not being able to send emojis or message friends on budget carriers.

Luckily, we corrected this mistake and increased our price to $165 per month for 1,000 messages, but this change took 18 months and a lot of work. Charging more let us focus on the features that were truly relevant to our business customers (read: not emojis).

Whether you’re taking your first look at pricing or trying to course-correct, the following tactics can help you get it right:

1. Talk ROI, not cost.

Instead of worrying about how much your customer wants to spend, think about how you will help your customer be more successful. Learn the size and scope of the problem they face. Ask, “How much money or time can I save them?” Focusing on the ROI versus the amount on the bill will help you feel more confident in your business’s value when you ask for a premium price.

2. Bring on advisors.

The first few people who use your service should feel more like advisors than customers. "Advisor" in this case is grandiose terms for early leads who can help you get honest feedback regarding the cost of the problem you're solving. Think about offering valuable advisors year-long discounts or limited equity compensation.

3. Determine a “fair” price, then charge more.

Don’t undersell your product. Set what you think is a reasonable price, then triple it. This gives you plenty of padding when customers want to negotiate. That said, don’t negotiate with yourself. Wait until your customer actually rejects the original number. This approach often shows you the correct price, as your customers negotiate down from the higher number, you’ll see how much they’re actually willing to pay.

4. Don’t publish your pricing.

Over time, your customers will cluster around a certain price point. But before you get there, you shouldn’t publish your pricing on your website. If you must, wait until you have at least 10 customers. Proclaiming your cost significantly weakens your negotiating position and makes it harder to increase prices in the future.

Trust me, I know it’s tempting to lower prices to attract more customers. But if you’re aiming to be a thriving business, you should expect to charge a premium price in the early days. By focusing on ROI, utilizing initial feedback, leaving room for negotiations and keeping prices hidden, you will be well-positioned to help ensure financial success and capture the right customers for your business.

Photo: Getty Images

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