Charging “Too Much” is the Best Way to Lose Money, Even if Customers are Buying at That Price
Twice in my life I’ve charged someone way too much money for a service.
One time, it was because I thought I could get away with it (this was in 2011 when I was doing consulting). The other time was because I didn’t know how much I should have been charging.
And both times I got burned. Because charging too high of a price never works out. One of two things happens:
(1) A customer realizes they’ve gotten ripped off and gets pissed/immediately tries to switch away and find a new service provider.
(2) A customer paid as much as you charged because he/she thought they were going to get a lot more and there was a major f*ck up in communication.
More likely it’s the second reason. People expect to receive what they paid for, and if you charge someone $100 for something worth $80, the customer will find out (by what they’ve gotten, or by what someone else tells them).
And if you do charge too much, hopefully the customer finds out early when they can bail and the damage is low. Otherwise they’ll find out way too late, by the time the damage is huge, and by the time reputations are lost and things have gotten ugly.
Selling a Service for Too Much Money
If you sell a service for too much money, by the end of the project the customer will expect more to still be done. She paid for $100 worth of work, and she’ll expect you to complete at least $100 worth.
By that time the options are two-fold: (1) Not do more work and damage your reputation, leading to fewer referrals, fewer new customers and less revenue (plus less of an ability to charge fair rates later) or (2) do a lot of extra work at the end in exchange for ripping the person off in the beginning, incurring scope creep and dealing with extensive initial costs.
Selling a Product for Too Much Money
If I sell a widget for $100 when I know it’ll be worth less, I’ll get bad reviews, I’ll get fewer future customers, a higher churn, and my return rate will likely be higher, leading to higher costs and less revenue.
If I sell my shares for too high a price
If I sell the shares of my company for too high a price, I’ll have set expectations too high, leading to unhappy investors, future structure, down rounds and a more difficult time raising capital in the future. Which will lead to greater dilution than if I had originally sold them at the right price.
People usually think of pricing as an input to a supply and demand chart. And figure the only reason to “not charge too much” is because “less people will buy at that price.”
But I’d go one step further. Even if people would buy at that price, it doesn’t mean “charging more than something is worth” won’t end up hurting your business down the road. It just means you’ve either oversold or the market is naive. And markets don’t stay naive forever. And when the pendulum swings back, it usually doesn’t swing back to an equilibrium.
If you’re ever sitting there thinking “wow, I just got an amazing deal on this,” get ready for a shit storm. Everyone else is going to find out soon. Even if the repercussions aren’t immediate.