Why start ups underprice work (and why they shouldn’t).
As a start up, pricing a project, your work or your time, is a difficult task, and one you will face from the very get go in your business adventure. From experience, it is easy to underprice. And for whatever reason, it is easy to underprice regularly, again and again, and believe me, you will tire of concluding that “we are too fucking cheap!” after a while.
Why start ups underprice.
Pricing work correctly is no easy feat, when you have to consider questions such as the following; What is the rate you want to earn? Should you charge day rates, rather than hourly rates? What would your wage be? (Note: you will want to write ‘millions of pounds’ here, unfortunately it is probably some way short of that. You can always try…) What do your competitors charge for a wage? What sort of spend do clientele in your area have at their disposal? What is the consumer willing to pay? (Note: Again, it is probably not millions of pounds.)
During the initial stages of a start up, the biggest challenge is learning to accurately estimate the time it will take to complete a project. You will often find at the conclusion of a piece of work that you estimated wrong, and worked for far less than you anticipated (or next to nothing at all, as we have experienced in a number of our earlier projects.) Unfortunately, once the price is agreed, you have to hand over the project, put on your best ‘customer face’ and accept the peanuts you signed up for. All you can do from this is learn. Start to keep note of the hours you worked on each project, the cost of the materials you used, the details and extras you forgot to include, and begin to build a data base of sorts, that can be used as a reference point for future costings. This can become an invaluable tool moving forward.
Another reason that leads to underpricing is a lack of experience, courage and conviction. I can admit that we have gone as far as to reduce our final project price, almost out of doubt that our calculated totals could be right — does that not sound like a lot of money? Like, too much money?! Of course it does. It’s naive, but seeing as large price tag next to work you produce yourself takes some getting used too. Self doubt can be a heavy influence on your final price, and unfortunately this only changes as belief in yourself and your product/service grows.
Sometimes, a desire to beat competition in securing the project can lead to costing too cheap. In the past, we have been guilty of telling clients we will be cheaper, or can be cheaper, even asking for clients budget to price within from the offset. Although it may succeed in getting you the work, you will now be pricing the commission to their needs and budgets, rather than costing effectively to maintain and further your start up. Many entrepreneurs start with the assumption that all startup products should be priced lower than the competition. We certainly followed that assertion in the early days — the flip side to this is your cheap price lowers your earnings, and can even lower the perception of quality in the customer’s eyes. (More on this below).
Why start ups shouldn’t underprice.
To cut to the bottom line, underpricing means you lose profit margin, or in the worst cases, work to a net loss. If you are only being paid for your labour costs, where is the capital left to invest internally in the start up? Profit margin, however little, provides some income to your business, and not just your own pocket. This is essential to cover overhead expenses and costs of producing your work, and it can be used to support you and your team, and help to provide the resources you need to continue adding value to current and future work.
“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” — Katharine Paine
There is an argument that in any case, overpricing your work is always better than underpricing. Overpricing can illustrate confidence in your service/product, and signal it’s quality. If you align your prices with the markets, and with competitors, you are asserting that your work is of the same standard. Do not try to cut price to show you are a better deal for clients, instead, match prices, but find other ways to overcome competition… consumers often infer quality from price among other factors and lower pricing can lower the consumer perception of quality. If it is less than the market place value, surely there must be a reason behind it? You should always aim to compete on value, not on price. The motto of “You get what you pay for” never rang truer, and your price can elude to this, positively or negatively.
As mentioned earlier as a reason why start ups can underprice, trying to cost in relation to a clients budget can be a sure fire way to gain the job, but if the client’s budget is way below the estimate of your work, is the project really worth taking? Although accepting the price can seem like the right thing to do, especially in the early days of your start up when you are less likely to reject work, when it’s done and dusted, and you assess your invested hours, more often or not you will find you have been underpaid. It is always hard to walk away from a job, but sometimes it is the necessary thing to do to maintain your a) business and b) soul.
Is it ever acceptable to underprice? A few considerations…
There are a few exceptions where underpricing could be considered. Don’t astronomically raise pricing for the clients that stay with you, or who invested in you from the start. These are the people that took a chance on you, and may even have been the ones to get you your big break. Try not to repay them with a huge hike in prices, should they come back for future work.
Friends and family, or ‘mates rates’ can be an effective way to make yourself a little cash, whilst gaining further work and boosting profile. Your friends and family can still spread your name and share your work, so don’t disregard projects for those close to you. Working cheap for those you know can be a great little earner on the side, but bare in mind it can only be sustainable if it is not your sole income, or in the case that you have many, many friends. Lucky you.
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