The thumbnail version:
- Pricing can make or break your business.
The full version:
Av few posts ago I discussed the importance of pricing. To further reinforce the point, here is a true story (only the names have been changed) told in excerpts from my book, Characters Who Can Make or Break Your Business. It’s about a textile screen shop, but is equally applicable to a sign shop.
To set the scene . . . Greg had resigned from a large shop, Nordic, to start his own operation, taking one of his former boss’s biggest customers with him. This big customer was going to be Greg’s only customer.
“I visited Greg’s new business about a month after he started up. He proudly gave me the grand tour, boasting, ‘It’s so totally cool that I’ve created this happening place.'”
To paraphrase for a moment before returning to the excerpts . . . He was busy, with three or four employees churning out Tees on a big, brand newly-leased automatic press. It sure had all the signs of being, as Greg put it, a “happening place.”
“Greg was very pleased with himself for having ‘stuck it to Nordic.’ When I asked whether he’d managed to negotiate a good price with the customer he said that he’d only had to give them a slightly better price than Nordic was charging.
Consulting an accountant could have prevented this disaster.
I asked whether an accountant had checked the viability of his pricing and he assured me there was no need for that because if Nordic was making a lot of money at those prices, then he would too.
I had not been invited to offer business advice and when I sensed that I might be crossing a line I refrained from sharing my immediate thoughts—You did what? You just assumed that Nordic was making money at that price? You didn’t take into account your own overhead structure and cash flow commitments? You didn’t consider Nordic’s economies of scale? You plunged into this after undercutting Nordic’s already low price and without any understanding of how that price was calculated?”
Jumping ahead to the last excerpt . . . “Six months later we received a package from a firm of trustees in bankruptcy and wrote of Greg’s bad debt . . . ”
I don’t think this pricing story needs any more explanation.