Do You Know the Fundamentals of How to Set Your Prices

In honor of Black Business Month, which is a celebration of centuries of contributions by Black business owners across America, I want to tackle what I think is a barrier to the success of solopreneurs and microbusiness owners everywhere.

That barrier is: Setting our prices incorrectly.

The problem is not that we haven’t set our prices, the problem is that you’ve likely set your prices too low. That may seem okay for now, but in the long run, believe me, it’s a ticking time bomb. It will eventually explode.

I see this all the time in early stage businesses. We set prices in ad hoc fashion, without any notion of strategy. Most of the time, inexperienced business owners rely more on ego, gut feelings, and intuition, or on what the competition is doing with their prices. The answer is to look at our own particular business and operational needs, and from that analysis, set our price.

Setting prices too low is a classic mistake that traps us in a kind of Faustian bargain. Our low prices may prove attractive to more people, but as we sell more products or services at little or no profit—or even at a loss—the seed of our business’s demise is planted.

This trap is so easy to fall into for a number of reasons.

The main reason being that we have been trained and conditioned to think like employees, not like business owners. When you have a job, setting prices is your boss’s concern, not yours. Then, when we become the boss, we feel insecure, unsure of ourselves, doubtful about the value of our work. It’s too easy to set a nice low number as the price and get on with it.

Minorities feel this pressure to undervalue their work most of all. According to the Institute for Women’s Policy Research:

Nationally, all Black women with earnings were paid 66.5 cents for every dollar paid to White men in 2022.

As you can imagine, we simply can’t afford to bring that type of dynamic into our businesses. Our businesses should be a means to achieve freedom, not a continuation of the exploitative tendencies of the system.

The second reason why we set prices too low, is that no one ever bothered to show us how to do it right. Unless you’re in an MBA program, how to set prices is not something that is discussed or taught anywhere. You can spend your days going to every manner of web and in-person seminar, or even many small business accelerator programs, and still find yourself as in the dark about pricing as you were before. This should probably not surprise us. Though pricing is not brain surgery, it can be confusing, even for seasoned experts. Because pricing is technical in nature, it’s hard to explain it in language that’s easy to understand and useful for all kinds of businesses.

The third reason is perhaps the most interesting of all. Because setting prices is both an art and a science, it’s both analytical and subjective, and it’s as much a marketing challenge as it is a finance and accounting one, misunderstandings and misinformation abound. In a perfect world, your accountant should be your go-to guy (or gal) to set you straight about your prices, but these folks are generally clueless about marketing and brand strategy so in the end, they’re not much help. The reality is that few people understand strategy and both sides of the ledger.

But as the great basketball coach, John Wooden, wisely noted, “The more concerned we become over the things we can't control, the less we will do with the things we can control.” So, let’s work together to focus on what we can control: adding clarity to the issue of how to set prices in your business so that you build the kind of business you want.

As I already mentioned, you’re probably setting your prices too low, and in this new series of semi-daily articles for Striver Confidential, which I am collectively titling Know the Value of Your Work, I want you to understand that your prices are not a number plucked from thin air, they are an expression of your strategy, and the value you bring to the table, and the value you get to keep.

Tune in Friday as I cover how prices relate to your business strategy and positioning in what we all know is a very noisy market that loves to try to ignore us.