There's a funny thing about entrepreneurs: They're often way too optimistic about sales and way too pessimistic about prices.
I've witnessed this phenomenon many times over the years, most recently in two women with whom I've been working. A few months ago, Carey Balogh and Julia Dawson opened a play space for kids near my home in Brooklyn, New York. It's called Frolic, and it offers classes, birthday parties, a boutique, a coffee lounge, and a play area, all with a rock 'n' roll theme. It's a great concept, and it will be very successful, I'm sure. But first, Carey and Julia need to learn that business decisions must be guided by numbers, not emotions.
When Carey and Julia come to see me, they're always bubbling with excitement. They can't wait to tell me how well things are going—how many members have signed up, what new offerings they're considering, the great publicity they're getting. Then we go through the numbers and discover that they're not yet breaking even. They're losing money every week. "You have to make some changes," I told them recently. "If you don't, you'll run through your capital and be left with two choices."
"What are the choices?" they asked.
I told them they could stop taking salaries. "We can't do that," they said. "What's the other choice?"
"You can close the doors."
"But we're successful," they protested.
"Not yet," I said. "And if you don't follow the rules of business, you'll go broke."
We began looking at how they might increase revenue profitably. And that's when we ran into their pessimism about pricing. Carey and Julia set prices the way most other novice entrepreneurs do it—by looking at what competitors charge and then charging a little bit less. But Frolic isn't like the other play spaces. None of them have a facility with an atmosphere as exhilarating or a space as creatively designed. Carey and Julia can certainly charge more. Will they lose some customers as a result? Very likely, though not the ones they should be targeting. The customers they want are the parents who care about—and are willing to pay for—Frolic's amenities. Charging an appropriate price, I told the women, will put them on the path to profitability.
Fortunately, Carey and Julia are eager learners and quick studies. I have no doubt they'll master the rules of business soon enough. Anyone can do it, and all entrepreneurs should.