Sales down? Margins Squeezed? Worried about the impending recession? If so, here is a top tip: put your prices up.

I run regular sales workshops with early stage companies and invariably find that they are not charging enough for their products or services. They feel that in a competitive market they should be forever shaving their margins and lowering prices.

The reality is that if you are perceived as cheap,  people will worry about buying from you. Most people prefer paying a proper price if they feel they are getting quality and value. These are the customers you should be targeting, not the ones who forever complain about your prices.

Sensible pricing is clearly important for companies that provide a service. But products also have a strong service element. Customers want them delivered on time and to work properly. They also want to receive prompt, friendly and effective customer service if there is a problem. These elements cost money and should always be factored into your price.

Software is a good example of both product and service. It looks like a product, all nicely packaged in a box, but is in fact some cleverly arranged instructions which enable your computer system to provide a service. Software can be expensive to develop but once these costs are covered you can sell any number of copies. The cost of scaling up is relatively small.

However, many software companies price their software too low, essentially by looking at the cost of production, rather than measuring the benefits the customers will eventually receive.

A good example is Broadbean. Dan McGuire, Broadbean’s founder, had worked in the recruitment industry and saw a gap in the market with the arrival of  internet job-finding sites, such as Monster.com.

Recruitment agencies began to put their vacancies on these sites but the process was time-consuming and tedious. McGuire’s plan was to automate the process of posting vacancies using a clever piece of software.

He suspected that the recruitment industry was tight on margins, so he priced his software very low, starting at around £100 a month. He spent several months in the doldrums, not even taking a salary. Not only were agencies loath to spend even £100, he also had competitors offering a similar service for £10 a month less. He knew a price war would quickly bankrupt his company, so he took a  radical step. He tripled the price of his software.

This had an immediate effect. Potential customers were initially very sceptical, asking how he could justify charging so much. McGuire believed in his product and could show that not only did his software save considerable labour for the agencies, it also quickly paid for itself many times over, thus providing value for money.

The lesson here is that it is much easier to find ways of improving your products or services than it is to reduce your costs. A simple exercise is to look at the occasions when existing customers were satisfied and did not quibble about your costs. Invariably, it was because you provided excellent service. All you need to do is to provide these elements to all your customers, all the time.

If you do, they will usually pay a sensible price, but sometimes you find yourself dealing with an experienced negotiator, such as a purchasing director, who is very effective at asking for discounts.

But don’t panic. I recently moderated a conference for purchasing directors, and they all said it is never just about price. What they are looking for is value for money. If you can justify your price on the basis of good quality, delivery and customer service they are always prepared to listen.

The idea to put his price up worked for Broadbean. McGuire now has more than 40 staff and was recently awarded Young Entrepreneur of the Year by Real Business magazine. He plans to open up on the US West Coast and in Asia so he can provide 24/7 coverage for his international customers. This is a valuable service which I am sure will be reassuringly expensive.

Mike Southon is a serial entrepreneur, author and business mentor. mike@beermat.biz