6 Dangers in Underpricing Your Products or Services
Underpricing of products and services is one of the common mistakes that new entrepreneurs or business owners make. They often make this mistake in attempt to boost sales, woo customers, and overtake competitors. Most times, this unprofessional move boomerangs and hunts down these entrepreneurs and business owners.
The fear of this experience explains why a lot of businesses now have associations or boards regulating and controlling their pricing. As an entrepreneur or a business owner, are you still unsure about the effects of underpricing your products or services? Here are 6 dangers of underpricing your products and services that could help clear the doubts.
- Inability to Cover Costs
When products are underpriced, it means those products or services are priced below their actual market value. And the costs of manufacturing, promoting and delivering a product, is what determines its market value. For a product to be priced below this value, it means the product is priced below its actual cost.
When products or services are priced below their actual costs, the revenue that would be generated from the sales of those products would not be enough to cover the expenses, thereby leaving lapses that needs to be covered. This explains why businesses go bankrupt. Even after making great sales, the revenue can’t complement the cost.
- Probable Loss of Customers
Potential loss of customers is one of the biggest dangers in underpricing your products or services. When customers perceive your products or services as being ‘too cheap’ they might leave and never come back.
Products or services perceived to be too cheap are often assumed to be of low quality. This is a common human error that we obviously can’t do anything about. You can only control your prices; you can’t control how the customers perceive those prices.
Customers won’t also want to go for products that they perceive as being too cheap, because of peer pressure, and their own self-esteem. They would feel that their colleagues at work, neighbours at home, friends and family, would start to belittle them, when they get to know that they bought a cheap product, especially if there is another brand selling the same product, but at a higher price.
Underpricing your products or services would only put you at risk of loosing your customers to your competitors.
- Inability to Reach Financial Goals
When your products or services are perceived as being too cheap by customers, and they leave, the level of the sales you will make would obviously be reduced, which means the revenue would be way below the target, costs would not be covered, and also profits would be reduced, or there might not be any profit in a worst case scenario.
When all these surfaces, the financial goals you planned to reach, would definitely be affected. Tis explains that it’s not just enough to establish your financial goals, you also need to ensure that your products or services are properly priced, and not priced below what they actually cost or worth.
- Low Market Ranking
When your products or services are underpriced, and perceived to be of low quality based on how cheap it is, it won’t only affect the product’s sales, your brand would also be affected. It would be ranked below par by the public, when it comes to market ranking.
Having a low market ranking reduces your chances of getting new customers, or even keeping the old ones. No one wants to associate with a business or brand ranked below par. Customers would stop suggesting your products or services to their friends, other brands would be cutting off their affiliation with your brand, you’ll begin to lose contact, and your network would also begin to shrink.
Read Also: 25 Ways to Brand Your Business
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Probable Loss of Investors
Investors don’t usually want to lose money too often, and underpricing your products would not guarantee the safety of their interests. When prices are underpriced, sales affected, revenue reduced, and costs aren’t covered, the interests of the Investors would definitely be affected, unless you as the business owner cover it up with your personal funds, which would still result to your own loss.
And even when the interests of these Investors are not affected, but the market ranking is low, they would still want to detach themselves from the brand, to safeguard their future investments. It’s still a lose/lose situation.
- Potential Loss of Business
You can be at the risk of losing your entire business, just for underpricing a single product. If the underpriced product affects the brand which most definitely would, the business is gone, and would require heavy promotion and advertisement to bring it back.
It would be unwise for any entrepreneur or business owner to allow a product, or pricing misconception cost him/her a fortune.
To avoid making this mistake, and putting your business at the risk of all these dangers, there are several pricing scales that you can take advantage of, to properly price your products and services for profit.
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