Whether you’re selling handmade goods on Etsy, pricing out a new contracting job, or selling your freelance services – underselling the worth of your products and services is a common problem in the small business world. Why? When small businesses are just starting out, getting work or shifting product is often more important than finding the right client. This catch-22 then sticks with you, trapping you financially and professionally. Here are a few more specific reasons why we often get stuck in this rut and ways out of them:
Underestimating the Length of Time it Takes to Complete Work
Perhaps the biggest reason for undercharging our products and services is that we have a tendency to misjudge the scale of projects, particularly during the start-up phase. If you don’t develop this skill, you’ll be a frustrated business owner for a long time. Tip: Clients need timelines too. So get into the habit of breaking down projects including deliverables, component parts, and don’t forget to factor in variables (use these as a guideline, you don’t always need to share them with the client but the exercise will give you a good picture of how many billable hours you need to dedicate to certain jobs). Check out these tips from Alyssa Gregory: How To Estimate Time For A Project. And remember, learn as you go and apply each new lesson learned to the scope and pricing of your next project – that way you’ll never undersell yourself based on time again. Also remember your own time management on a project can mean the difference between a profitable contract and a loss and drain on your time.
Misunderstanding the True Cost-of-Goods-Sold (COGS)
COGS is the actual cost of the product you sell. This differs from other costs such as buying inventory, because it factors in the variable costs that go into procuring the product and getting it ready for sale, for example, the cost of raw materials, labor, production costs, and so on. If you don’t take into account these costs when pricing your products you can quickly undersell your products and eat into your profit margins. Tip: Learning how to calculate the cost-of-goods-sold can also provide tax savings, if calculated correctly. Read more about how to calculate COGS and use it to inform your pricing and offset your taxes.
Calculating Freelance Rates Based on Your Old Salary
If you’ve come out of the workplace and setup a freelance business, pricing your services based on what you were paid in a 9-5 environment is a big no no. It sounds a reasonable assumption, but if you do the math (salary divided by 52, divided by 40) you’ll quickly realize you’re selling yourself cheap and unlikely to make a realistic living. Why? A regular salary doesn’t take into account the true costs of being self-employed; you simply can’t compare the two. Tip: One of the biggest challenges to setting your freelance rates is that it’s very rare to find one rate that will suit all your clients. The second challenge is settling on a rate that works for you and your lifestyle.
Getting Hung up on Price
Underselling yourself with a low price point can do more harm than good. Sure, there are times when selling on price has its place, for example if you need to shift inventory to free up cash flow, but underselling based on price will only serve to lower the perceived value of your brand and product and attract customers who only care about price. Remember, once you start underselling yourself, it can take years to recover your pricing strategy. Try to sell based on value instead. Tip(s): Value is about so much more than price – it embodies the entire customer experience – including the product or service itself as well as your business’ commitment to customer service, reliability, communication, follow-through, exemplary employees, and so on. All these factors combined, not just your price, is what will differentiate you in a crowded marketplace. Read more in our blog: How to Start Selling on Value.
Ignoring the Input of Other Business Owners
Networking is a powerful tool for small business owners. Yes, it can help bring clients and partners your way, but perhaps more importantly it’s a great way to learn from those who’ve walked in your shoes about pricing your work as well as the legal, regulatory and operations elements of running a business. Tip: Get out there and network. Attend local business groups, look for opportunities to network when you travel, get active on LinkedIn. Look up old school pals who started their own businesses. Your options are limitless.
Thinking Some Income is Better than None!
This is a big factor in why freelancers and small business owners alike undersell and underpay ourselves, especially during dry spells. Don’t go down the rabbit hole of compromising your profitability by accepting low-paying gigs or cutting your prices to ease up cash flow. As mentioned above, it will also make it harder to dig yourself out of a rut and jack your prices up later. Tip: Use your business plan to guide the kind of market and customer you want to target. Good old experience will also tell you which ones to steer clear of and which ones to gravitate towards. If you can afford to (always shore up savings for dry periods), focus on diversifying your offerings, rekindling old business or going after new. Ever made the mistake of underselling yourself? Has it ever worked in your benefit? Leave a comment on the Fundbox Facebook, Twitter or LinkedIn pages. About the Author:
Fundbox is a technology company that is fixing the small business economy. Fundbox is helping SMBs, freelancers and home offices grow by managing their cash flow better and by overcoming short term cash flow gaps.