Novice business owners rarely price correctly. Many new businesses underprice in an effort to win new customers and community goodwill. Others price high, but fail to provide enough value to justify the price.

Underpricing means a lot of work and expense for less revenue. It means you are underpaying yourself. You didn’t start your own business to be underpaid; you’ve left bad jobs because of that.

If you’re good, price like it.

At the same time, a great way to earn the contempt of your market is to overprice. If people think you are overpriced, you have failed to offer a good value proposition. Expect bad reviews on social media, news media, and review platforms such as yelp or Angie’s List.

It’s all about the value proposition.

Yes, the formal definition of a value proposition is a statement that explains why someone should do business with you. It’s a marketing statement, like this one from Shopify .

“The e-commerce platform made for you”

Whether you sell online, on social media, in store, or out of the trunk of your car, Shopify has you covered.

But really, a value proposition refers to a state of mind; and a good deal is a state of mind. Which brings us to the unwritten, but important rule.

“They will get mad if they see the fee.”

In a recent Business Insider story, restaurant owners faced a dilemma. Social distancing orders reduced sales to near-zero and rising food prices inflated their costs. In order to stay in business, price increases were necessary. Some restaurants decided to add a surcharge. Clearly they hoped that people would understand and be supportive.

“They will get mad if they see the fee.”

One angry customer posted a photo of her receipt showing the surcharge on Twitter. The tweet went viral, and was picked up in local media. The negative publicity resulted in harassment of the restaurant’s employees. The restaurant, and others who had also added surcharges dropped the surcharges and instead raised prices.

It is hard to blame restaurant owners for wanting to avoid increasing their prices. It’s a hassle. New menus must be printed and published. Additionally, they may be reluctant to increase prices on customers in a down economy.  So the surcharge seemed like a more convenient option for them.

“They will get mad if they see the fee.”

Customers of restaurants or any other business tend to react poorly if they see fees added on that appear to have little connection to what they just bought. You cannot expect them to understand or sympathize with your reasons for adding such fees, although many of them will. Consider it your duty to adjust to your customers’ perspective, rather than their duty to adjust to yours.

In many industries, fees and increases must be disclosed. In that case, do it using the best public relations tactics you can. If not, you can adjust prices without explanation.

Don’t break this unwritten, but important rule.

They will get mad if they see the fee.

Increased costs are certain. While business owners are uncomfortable raising prices on known and loyal customers, it has to be done. But how?

1. Know the profit margins of your industry. There is always a range. For example, margins of retailers might range from 29-40 percent. Lower-priced retailers operate on high volume, while higher-priced retailers operate at lower volume. Higher margins should be justified by higher quality. For example, Wal-Mart and Neiman Marcus both sell clothes. In your space, are you closer to the Wal-Mart model, the Neiman Marcus model, or somewhere in between? If you plan to change your profit margins, you can easily recalculate your prices using this margin calculator.
2. Re-calculate your break-even regularly. Rising prices cause a ripple effect of other increasing costs that aren’t so easy to track. For example, higher property values tend to increase property taxes and insurance. Those higher bills can sneak up on you. This video can help you keep your break-even point, your budget, and your profit margins accurate. So can this calculator.
3. Raise prices incrementally. Giving your customers sticker shock is a great way to lose market share, brand value, and customer goodwill.

If you must adjust prices, do it as gradually as possible. Do it in a way that allows you to meet your needs. It also allows you to quietly test the limits of demand until you find optimal prices. There was nothing quiet or subtle about the “COVID-19” surcharge tacked onto the restaurant bill in this story. Changes in prices require finesse and an accurate reflection of your costs.

They will get mad if they see the fee.