It can always be found cheaper online.

That’s the new rule for the new age of business.

And while you offer something of value, your prospects are willing to spend $8 on shipping and handling if they can shave $4 dollars off the price you charge.

It’s outrageous! It’s unfair. It’s not logical.  

And yet, more often than not, you’re giving them every reason to do so.

How Business is Done in the Wild West

I used to know a business owner who did very well for himself.

He was a people-person. He knew everyone in town.

Everyone wanted to do business with him because he provided the most personal service.

Hours were spent helping his customers solve the tiniest issues for free, knowing that it would come back in the form of future sales. They loved it.

He worked in the "Wild West" of business.

A handshake was as good as a contract. Customers were loyal by default. And as the owner, he was at liberty to adjust the selling price of his products for each transaction.

Knowing the value he provided, he had no problem charging as much as possible.  

He would determine what the customer could afford and charge accordingly.

$20 for the mom with 3 kids. $50 for the man with the gold Rolex.  

How a Business Became a Ghost Town

Business went on like this for quite a while. And very effectively, I might add.

Then, in late 2008, the economy grew worse and the mom and her 3 kids stopped coming in.

Soon after, the man with the gold Rolex came in less and less.

Every once in a while the bell on the door would jingle and a new face would walk into the storefront lobby.

"Hi, I purchased this widget online and was told you have the best service around. Can you help me fix it?"

And just like that, his once thriving business became a hub of free customer service.

The Challenge in Small Business

At one point I had a conversation with this man regarding the situation he found himself in.

He blamed the economy. He blamed internet pricing.

He said he couldn’t change his pricing model because charging his high-paying clients any less would be "leaving money on the table" – not to mention eroding the value he provided for them.

And he didn’t want to raise his prices, because during a tight month, a lower priced sale was better than no sale at all.

He was trapped in a cycle of one-off purchases. Each transaction was a battle to convince the buyer why they should buy from him.

It drained him of his energy and his passion.

Such is the dilemma facing most small business owners. Especially today.

How much is too much to charge? How little is too little?

In order to find the right price point to compete with the internet, the economy and the guy next door, you need to address some things.

Who Sets the Price?

The first thing you want to do is stop thinking too much like a Technician in terms of revenue and profit.

Most owners think like this:

"This transaction requires X amount of time and dollars to produce. So if I charge A for this sale, the total profit will equal B."

An Entrepreneur thinks in terms of building equity in the business. Not individual sales.

The Manager puts systems in place to actually get there.

You need to write down a clear vision of what your business will look like in 3-5 years, so you’re not vacillating on low level pricing issues without having a larger context.

You need to decide what kind of business you’re going to have.

Are you going to be the McDonalds or the Ritz Carlton of widget sales? Perhaps somewhere in between?

Until you know this, you’re likely to try to be all things to all people.

The result of this mentality is the kind of mediocrity that typifies the average business and thus drives customers elsewhere.

Rest assured you are not alone in feeling this kind of responsibility. Perhaps we all naturally feel a pull to please everyone.

The trick is realizing that you’re not better serving your customers or yourself by trying to do so.

Where is Your Product Going?

After determining what kind of business you’re going to be, you have to get clear on the market it’s going to serve.

How do people perceive your product? How much money do they have budgeted for services like yours? How price sensitive are they? (Hint: you can start determining this by listening to what people say about your competitors’ products, services and pricing).

What kind of impact do you want your business to have on the world? Truly ask yourself if you can you be o.k. with "leaving money on the table" if it better serves your market.

When customers get great value they tell a few people. When they feel ripped off, they tell twenty.

So you want to consider the reputation you’re always creating, intentionally or not.

How Much Do You Charge?

Finally, pricing is very much a strategic financial issue. You have a business to run and it needs to make a profit.

Exactly how much profit you want to make, and by when, should show up in your Strategic Objective.

So start looking at the numbers. If you have accurate financial statements, get them out. (If you don’t, see an accountant immediately).

These are your reference points:

1. Balance Sheets
2. Income Statements
3. Cash Flow statements

This is where you assess revenue vs. expenses. From a high level view.

Evaluate these statements to determine how much it costs you to produce, support and sell your product over 3 months, 6 months, 1 year. 

This is also where you’ll see the history of your actual sales, so you can accurately estimate your output and assess the differing sales between your various products and services.  

Now determine how much profit you’ll make by selling Y amount of widgets at X amount of dollars over the same amount of time.

You may discover that there are some products or services that are costing you more to provide than you can ever recoup.  This may be the time to consider trimming the fat.  Your overall profit margin will automatically improve.  

You will want to run some different scenarios to determine the outcome of various price points for your product or service.  

This is where you can adjust the numbers.

What’s the least you can charge per product and service? What’s the most?

Is it more important to maximize cash immediately, or appeal to a broader audience?

You should be able to arrive at a price that will serve both you and your market.  

When your customer feels that the value they’re receiving from you is worth more than the money they are exchanging for it, there’s no competition.    

If this article has inspired you to think about your business finances and the decisions that affect them, click here.