by Matt Clark
New companies often don’t know their own worth. They don’t have a real idea of how much money it takes to run a business, and they’re afraid of overpricing and scaring away potential customers. So, instead, they set prices too low.
Any company can price low, but a low-price product does not build a loyal startup fan base. Worse, it usually attracts the worst kind of customers — ones that eat up hours and resources fighting over every penny.
As a startup you don’t have the luxury of pricing according to economies of scale. You have to depend on something other than price to compete. The only way to make sure you have plenty of profit left for that “something else” is to price your product high and make sure there’s plenty of margin per sale.
When I first started my business, I sold other people’s products at a 40 to 50 percent profit margin. I quickly realized I needed more profit to really make my business grow. My current venture nets me 400 to 500 percent profit per unit. Maybe that seems like a lot, but those margins allow me to grow a business around loyal customers that aren’t going anywhere any time soon.
How, you ask? Two words: service and marketing.
The best reason to build high margins into your business is that you can then offer stellar customer service. When your price is premium, you don’t have to worry about losing money with every customer interaction. A staff member can spend 30 minutes on the phone or live chat helping a customer. Even if the sales person ends up shipping another unit of product, you don’t have to worry about how much money it cost you. With the right margins, you’ll still be profitable. Customers given this great service will almost always sing your praises to everyone they know.
If you’re able to financially go above and beyond and give your customers a great experience, you will build the loyal fan base your startup needs to profitably grow.
Marketing also improves when you build in high margins. When it comes to direct marketing — particularly online — it’s the rare company that hits the first one out of the park. It takes time, testing, and tweaking to get the particular formula just right. Time, by the way, that you won’t have if you are operating on razor-thin margins. If you have substantial margins per sale, you can test more, test faster, and scale your marketing more quickly. Your company will grow larger in a shorter amount of time, and you’ll actually have the profit to handle the growth and overhead.
A loyal fan base helps a company — especially in its initial phases — grow exponentially. With premium prices, you can do more marketing, make more money, and bring in more of those customers. Once they’re in the door, the high margins make it possible to provide outstanding customer service. You can also use these loyal initial customers to continue to test, refine, and refocus your product, making it more valuable, increasing its marketability, and ultimately showing customers that their opinions and concerns are of top priority. These customers will not only be satisfied, they will also become repeat buyers and refer others to you.
This method of consistently bringing in new customers through good marketing and those customers continually buying and referring will catapult startup companies into much bigger companies.
But it can only happen if you build in high margins from day one.
Matt Clark is a serial entrepreneur, author, speaker, and health and fitness enthusiast. He is an entrepreneurial thought leader, and founded a multimillion-dollar product distribution business enterprise. He welcomes anyone to reach out to him on Twitter, LinkedIn, or Google+.