Like I said last Friday, under-pricing is a far more common mistake than over-pricing for small businesses (McKinsey reckons at least 4 times as common).

I got an inbox full of email in reply. (Doesn't sound quite as good as a sack full of post does it?)

First, this from reader Robert Jones:

" Matt, you are absolutely right about pricing.

" A lady I was advising manufactured very high quality children's clothes in her home. She sold direct, so pitched her prices below high street shops, even though her quality was in a different league.

" Her sales were dismal. I eventually persuaded her to treble her prices - within four months she employed 3 others and worked from an industrial unit. She then increased her prices further, got agents across the UK, and developed a very successful business. "

Thanks Robert, that hits the nail on the head.

The lady in question had a fundamentally sound business and a superior product.

But she was charging far too low a price. If she'd not upped her prices when she did, she would have gone under. As it was she caught the problem just in time (with Robert's help).

The price hike didn't matter because, in Robert's words,"the lady in question was selling so little, losing what customers she had was really no loss at all."

She took action just in time . . . unlike the small business owner in the next story I was sent.

Why this entrepreneur went out of business

Peter MacGregor of Ranworth Associates also emailed me on Friday. This time the story had a less happy ending.

Peter once advised a young entrepreneur who had set up a business putting on Fireworks displays:

" After six months of apparently very successful trading he approached me to ask for help. It transpired he gone through the entire £5k loan that had been provided by a backer, plus a further £10k from his family!

" On close examination of the figures I was able to identify that he was charging his labour at £20 per event (lasting about an hour but with a full day or more of set-up time as well).

" When I asked why so little he said 'Well, I didn't think I'd get any more as a newcomer to the scene!'

" Unfortunately he was unable to raise more money and went bust about three months later - due entirely to under-pricing from the start. "

It's far easier to lower your prices than put them up

Peter's client had no problem getting new business. His business went to the wall simply because he was too scared to charge a decent price for his decent service.

You see, under-pricing isn't just a more common mistake than over-pricing - it's also a much more difficult mistake to correct. It's far easier to lower your prices than put them up.

The price you charge at the beginning is the first indication your customer has of the value of your product. If you start low, you'll stay low.

If you under-price, you only have two options (1) add additional benefits to retain your existing customer base (2) give up your existing customers.

For the Fireworks guy this advice came too late. He'd already invested all of his available funding building up a base of customers all buying at the wrong price. There was no going back.

Thanks again for all the feedback emails and anecdotes I received this week. Keep them coming!

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