The first mistake is a little nerdy but very important.

NOT REALIZING THAT MARKUP DOESN'T EQUAL GROSS MARGIN.

A lot of people say they're going to mark up their products 100% and then they think they're going to be able to pocket that money. Part of the reason is, they don’t understand that markup is one thing, and gross margin is something else.

Gross margin is the percentage of your sales that the business makes after they pay their cost of goods. And a 100% markup doesn’t equal a 100% margin. Let me explain. 

Let’s start with the #1 calculation I always tell you to learn.

Sales – COGS – Expenses = Profits

Gross Margin is what you have after you subtract your COGS from your sales.

To understand this a little better, keep in mind, anything you spend in your business is a percentage of your sales. If sales are 100% of your money to start with, everything else adds up to 100%.

Let's take a look at an example.

Let's say that you have a product that you that costs you $25 and you say I'm going to mark it up 100%. This means you take the same $25 that it costs you and add it to come up with a sales price of $50.

Now, let’s use our gross margin calculation of Sales – COGs = Gross Margin Dollars

We take our sales price of $50 and minus our cost of goods of $25, giving us $25. Which you will notice, is the same $25 we just marked it up. But this is why there is confusion.

Yes, your gross margin dollars are the same, but gross margin percentage is going to tell you how much of your sales price is going towards your cost of goods.

So that looks like this… (Sales – COGS) divided by  Sales  or  GM$/Sales. 

Let’s figure out what our Gross Margin percentage is using this calculation by pluggin in the numbers.

$50 in sales – $25 in cost of goods gave us $25 in gross margin dollars.

Now we divide this $25 by our sales of $50 and we get .50 or 50%.

As you can see, your markup was 100% but your gross margin was only 50%.

This means that while yes you marked it up 100%, you only have 50% of your sales left to pay your expenses and create a profit for the business.

If you want to learn more about gross margin vs markup, check out this video: What's the Difference Between Margin and Markup in Your Small Business

Now, the next big mistake small business owners tend to make when pricing their products or services is,

THEY FAIL TO FIGURE IN THEIR “EMPLOYEE” TIME INTO THEIR COST OF GOODS.

For many of you, you are the laborers in your business. And in order to get a true cost of goods you need to account not only for the materials you may use, but you must account for any labor hours that are part of creating the product or providing the service.

Many small business owners typically just pay their costs, set aside some for other bills and then pocket the rest of the money.

You must keep in mind; you wear two hats in your business. One as the laborer and one as the business owner. The laborer you, get paid out of the costs of goods and the business owner you gets paid out of the profits.

If you just pocket what is left, you fail to get a true cost of goods, nor does it prepare you for replacing yourself in the field one day.

Your prices, need to reflect that there is labor involved in creating the product or providing the service.

So it's important that you make sure your cost of goods are always correct and the only way you can get a true cost of goods is to make sure that you are budgeting for you, the laborer, in your business.

For example, let's say that you have a service based business and you have two labor hours.

And a fair wage is $20 per hour. The best way to think about a fair wage is, as if you were to hire someone off the streets what would you have to pay them to do what it is that you do? That might be $15, $18, or $20 or more. Remember you want a fair wage, not a crazy wage, just a fair wage you would pay someone to do what it is that you do.

Now let's say that this service you provide also has $10 in materials that you will use. This means that you have $10 in materials and $40 in labor hours giving you a true cost of goods of $50.  Not just the $10 in materials.

Think back to our number one calculation of sales – cost of goods – expenses = profit. In order for you to price correctly, you must have the right cost of goods.

This really becomes important when you start to hire people. Way too many small business owners are shocked by how much of their money goes to the labor side, because they never had a plan for it in the first place. By doing this correctly now, you've already worked into your pricing.

Now I'm not saying you need to create a payroll for yourself. I'm just saying you need to capture those costs on your profit and loss and when you're building your pricing to make sure that you are using the correct numbers.

Think of it this way, the laborer “you” gets paid $500.00 a week, and then if the business shows a profit you take even more money out as the business owner.

This gives you extra incentive to create a profitable business.

If you want to learn more about Paying Yourself Correctly in Your Small Business, then check out this video: Are You Paying Yourself Correctly in Your Business?

Now, the 3^rd reason why small business owners mess up their pricing is…

THEY FAIL TO ENSURE THAT THE SALES PRICE COVERS THEIR COST OF GOODS, EXPENSES & THEIR DESIRED PROFITS

You have probably noticed that I keep saying over and over the number one calculation you need to memorize is sales – cost of goods – expenses = profit.

The reason that I say this, is because this mirrors the way money flows through your business. You will notice that your profit and loss statement also follow this same flow.

Here is an example, your sales are on top, then there is your costs of goods, followed by the operational expenses and the Net Income, which is the profit the business made prior to taxes.

So in order to make sure that you are profitable, you have to make sure that every sale is collecting money to cover your costs, expenses and ensure you have a profit.

Let’s take a look at an example. You have a product or service that you collect $100 every time you sell it. And your cost of goods typically run 50% of your sales price. This means, your first $50 goes towards costs. Thus leaving you $50 to cover your expenses and potential profit.

Let's assume that your business expenses typically run 25% of sales every single month. This means that 25% of the original $100 (because everything is a percentage of sales) has to be set aside to pay your expenses.

Which means, 25% of the $100 you collected is $25. You then put this way to pay your expenses.

When a business owner doesn’t know what their expenses run, they often times will set prices willy nilly and think will cover them. Often times, they way underestimate the amount.

Which is why they end up stealing the money they normally would pay themselves just to pay the bills and this is typically why they are working for free. Because they fail to account in their pricing, the correct amount they need to pay their bills.

Keep in mind. You do not force your prices up just to pay your bills. You want to make sure you run the business lean and mean but keep in mind, your pricing can not only account for costs and what you want to make personally.

Let's say we have a business owner who collects $100  for the sale of a product or service and think they're going to make $50 because they know they have 50% for their costs. So they take $50 put it in their pocket and go on their merry way but later that they realize that they don’t have enough money to pay the bills at the end of the month. Now they have to dip into the money they thought they had but it is no longer there.

Keep in mind, your expenses will typically fluctuate depending on what the business is paying that particular month. Some things are monthly, some quarterly or even yearly. But you need to budget monthly to ensure you have the amount you need when the time comes.

The key is to always remember that for every sale, these three buckets need to be accounted for.

If you want to make $25 in profit, then you must have a good understanding about your costs and expenses.

If you want to learn more about Your Profit and Loss, then check out this video: The Basics of a Profit & Loss Income Statement for Small Business Owners

The fourth reason why small business owners fail to price correctly is…

NOT REVIEWING THEIR PRICING ON AN ANNUAL BASIS.

It is important that you take a look at your prices at minimum, once a year and make adjustments accordingly.

Over the last few years, prices and costs have gone up dramatically, yet so many small business owners haven't changed their price at all over the last two to three years.

What they are doing is absorbing those higher costs and expenses on their end and not passing it along to their customers. And thus, they are taking a pay cut (because someone has to make up that difference).  The business owner makes less money, and the customer is benefiting from the owner never passing this cost along.

For example, maybe you sell something for $75. Your costs last year were $40 but now they are $50. Your expenses have also creeped up a little due to gas prices. However, you still charge the same $75. Your bottom-line profit will now decrease due to your cost of goods going up and your operational expenses. What use to be a $20 profitable item, is now more like $8-$9 of profit.

Now I understand if the cost change is temporary but when you know that this cost is going to be your price going forward you have to make the change. Believe it or not the customer is expecting it because you're not the only product or service that's been going up in price.

Yes, they won’t like it initially. Who does? But if they love what you provide and it is a fair increase, they will be fine.

Plus keep in mind, every single year your business is growing. You might hire people which increases your costs, your expenses might go up because your business is growing. There is a host of reasons why you need to always be evaluating your prices.

Obviously, if your cost of goods are going up due to material costs and/or you have higher labor costs, your business can not afford to operate without passing this along.

There is a reason why a lot of those big box businesses that do what it is that you do, charge more than you. Typically, it is because their overhead is way higher than yours. Yes, they tend to have better brand recognition, but that is only one piece why they charge more, ultimately they charge more because they have to in order to stay profitable.

If you want to learn more about raising your prices, then check out this video: Quickly Check Your Prices to See if You Are Priced Correctly

Now, our next couple of mistakes are more from an emotional standpoint.

Our 5^th, pricing mistake is, way too many small business owners

SET THEIR PRICES BASED OFF OF WHAT THEY WOULD BE WILLING TO PAY VERSUS WHAT THEIR IDEAL CUSTOMER WILL PAY.

Let me explain

Let's say you have a service based business and you currently charge $50 for your services every single month. And you know you probably should be priced more like $75. But what happens is you personally feel uncomfortable paying $75 so therefore you never raise your prices.

However, your customers happen to live in a more affluent neighborhood and make more money than you do.

To them, the $75 is still a screaming bargain and if they love what it is that you do, how you provide it, and the amazing results they get, then they are going to be willing to pay that price because to them it's all about value.

Way too many small business owners struggle with their own internal perception of value versus what their customer's perception of value is. And in many cases, they would be perfectly fine with paying a little more as long as you are solving their pain point.

Another great example is let's say that somebody has a $10,000 watch. For some people, they would never in a million years pay for a $10,000 watch. I would be one of those people. However, there are other people that have the means to pay for a $10,000 watch and to them it's nothing. Heck, they even collect them. Is the watch worth $10,000? Depends on who you ask. For folks like me probably not, but for folks like them absolutely!

So when you're pricing your products keep in mind who your buyer is. What is their pain point and what are they willing to pay for you to solve that pain.

While most people would never spend more than a couple thousand dollars to upgrade their kitchen, others will pay 10s of thousands of dollars to have their dream kitchen. You just have to make sure that your value meets their expectations for the price you want to charge.

So please stop pricing based off of what you're willing to pay and start focusing on what your customer will pay.

If you want to learn more about how emotions impact your pricing, then check out this video: Are You Letting Your Emotions Get in the Way of Your Pricing?

All right, let's talk about the 6^th pricing mistake small business owners make when they're setting their prices and that is…

THEY FEEL THEY NEED TO BE THE CHEAPEST

But this isn't a race to the bottom.

It is very rare that you need to be the cheapest in town.

Yes, you are always going to have customers in your community that want the cheapest price possible. And there will always be someone who's willing to give that to them. But that doesn't mean it needs to be you!

When you feel obligated to be the cheapest you tend to way over-deliver for the prices that you charging. And you are not taking into account the value that you are providing.

You need to understand that if somebody is only wanting the cheapest person they can find, they were never going to be loyal to you anyways.  They will always chase the cheapest person.

Because the minute you made any kind of pricing change, they were going to jump ship and go with the cheaper option. But even if you didn’t change your price, if someone cheaper showed up, they would drop you like a hot potato as well.

A lot of people worry about raising their prices thinking they will lose customers. And more than likely you will. Especially if they were only using you for your cheap price.

But the reality is, that's OK.

Think about it, if you're not making any money on them now, what are you really losing?

However, keep in mind, if you find new people who are willing to pay the new price those people are way more valuable to you because they are willing to pay for the value that you provide. And they are going to be way more loyal than someone who is only using you for price.

Let’s take a look at a quick example.

Let’s say you have 50 monthly customers, and you make $10 profit on each of them. This means you have 50 customers x $10 in profit which is a monthly profit of $500

But let's say you raise your prices $10 so now your profit is $20.

And let's say you lose 15 of your customers and now you have 35 customers. Ouch, that hurts.

But what happened to your profits?

You now have 35 customers who are creating $20 a profit each month. So, 35 customers x $20 profit equals $700 in profit. Yep, you lost 15 customers, but you gained $200 more in profit.

Oh, and once you replace those 15 customers you lose, your profit now looks like this. 

50 customers x $20 or $1,000! Double what it was.

Now was it worth it for you to lose those 15 people?

You now double your profits, and you have more loyal customers. Oh, and by the way, you didn’t have to work any more hours to double your business profits.

That is what I call a win.

And yes, if you want to learn more about how losing customers can lead to more profit, check out this video: Raise Prices – Lose Customers – Make More Profit!

Ok. Now let’s talk about the 7th mistake that small business owners make when it comes to pricing

FINDING OUT WHAT THE MARKET CAN BARE

Let's face it, there are only so many hours in the day. And unless you plan to work 80+ hours a week, you need to find a way to increase your profits, without sacrificing your life.

Before you go hiring more people, make sure you are maximizing your profits.

You need to discover what the market is willing to pay for what it is you have to offer.

Remember in our last example, by just raising our prices $10 we were able to create an additional $200 of profit and by replacing the people we lost we were able to double our profits.

And as I mentioned, you didn’t have to work any additional hours.

You might have heard the saying that when you have too much business – raise your prices.

This typically happens when you start finding yourself scheduling out, weeks or months to take care of your customer.

The best way to slow down your business is to raise your prices.

The cheap people, like we mentioned, will go away but the people that have heard all about the value that you provide are going to wait it out. And they're going to be willing to spend more money.

You have built a business that people need, they want to use you. This is why they are willing to wait for you. And yes, many would be willing to pay more if they could get you sooner.

Once again, we don't always feel comfortable with raising our prices, but you will be shocked at how many customers will be willing to pay.

Now you'll notice that this particular pricing mistake, combines all the previous ones. Both business number wise and emotionally.

We understand the more they pay, the better the profits, but emotionally we worry they will not be willing to pay.

But what do you have to lose? You are already turning down business due to how long it takes for them to use you. Why not fill your pipeline with folks that will pay more?

It's important that you continue to raise your prices so you can find out what that sweet spot is that your customers are willing to pay.

Remember this is a profit game, not a sales game

The goal isn't to work as many hours as you can to create as many sales as you can. Yes you need sales to create profit but the first thing you have to do is make sure that the sales you are creating are profitable.

So, if you are too busy, raise your prices.

When you start noticing that you are losing way too many customers and not able to replace them then you know you have gone too far.

But keep in mind this is all about value and solving that pain point that the customer is willing to pay the price that you have set. Because they see that they're going to get an amazing value for what they pay. By dialing in to solve their problem and giving them the solution they want.

If you want to learn more about your options if you are too busy then check out this video:  Should You Hire or Raise Your Prices

WRAP UP

As you can see, there are seven different reasons and probably even more, but these seven are enough for you to concentrate on to get your pricing correct.

Which of these seven mistakes are you making in your business? Is it one of them or multiple?

7 Pricing Mistakes Small Business Owners Make

• Markup Doesn't Equal Gross Margin
• They Fail to Figure in Their “Employee” Time into Their Cost Of Goods.
• Not Ensuring Price Covers, COGS, Expenses & Desired Profits
• Not Reviewing Pricing on An Annual Basis
• What They Would Pay Vs What the Customer Will Pay
• You Don’t Need to Be the Cheapest in Town – This Isn’t a Race to The Bottom
• What the Market Can Bear – Way too Busy, Raise Your Prices

I'm pretty sure you've come to the realization that you have been holding back the profit that you could be making in your business by controlling your pricing.

So take one of these mistakes and run with it and let's work on getting your prices correct!

And don't forget to check the other videos referenced on each one to learn more.

Here is the link again to the full video of this article:  7 Pricing Mistakes Small Business Owners Make