Do you compete solely on price?

Why do customers decide to purchase your product or service? If it’s because you offer the lowest prices, and for no other reason, then your business will most likely fail because:

  • You won’t earn enough to pay your expenses and become profitable.
  • Your customers will quickly go someplace else if offered a better deal or if you try to raise your prices later.
  • Many potential customers will view your product or service as inferior or lacking in quality and thus never purchase.
  • You will become resentful if you do provide superior service and feel as if you aren’t being compensated appropriately (this is especially true for independent contractors).

You may think that, as a new business, you have to offer the lowest price in order to be competitive and get clients. But, that can be disastrous to your bottom line. You should certainly set your prices competitively, but they should be in line with what others are charging and you should find something else to be your differentiator. Do you offer personalized service that they can’t get from larger companies? Do you offer more customization options?

Let me tell you a story to illustrate what happens when you undersell your worth.

I know a cost estimator who attempted to start his own independent consulting business. When he got his first client, he gave that client a huge discount off the going market rate. He hoped in doing so it would begin a long-term repeat sales relationship with the client. The type of relationship entrepreneurs seek: a professional relationship in which each looked out for the other’s best interest.

However, after a few projects, at this greatly reduced rate, the cost estimator learned that the client was reselling his work for 4-6 times the amount he was charging. When he learned of this, he went to the client to negotiate a higher price for the next project. The client would not entertain the idea of paying more, even though he was making so much money. So the cost estimator, who was providing excellent work, decided to break off the relationship.

Later, he learned that the client had retained another cost estimator for three times the amount of his original discounted rate and also learned that the quality of the work was not as good. Eventually, the client’s business failed because of the shoddy work the new cost estimator was doing.

The lesson to be learned here is that once you undersell your services or products to another, it is very difficult for that other person to value you more. In other words, people don’t mind going down in price but once they are at that level they would rather attempt to go someplace else to try to get that same price again, instead of paying you more. What usually happens is that they don’t end up finding that lower price, but their pride prevents them from coming back to you to renegotiate. Adding to that, most of these situations don’t end amicably, thus that client does not return. It’s a lose-lose situation.

The moral of the story is: figure out what the market rate for your product or service is and if you feel you can deliver the same quality work that your competitors are delivering, then charge the same and differentiate yourself on something other than price. Also, keep in mind that if you are a one-man shop, you have a bit of a disadvantage because you will have to wear many hats (sales, production, and support). While it may appear that your prices can be lower because you have less overhead, in actuality you should be charging more because you don’t have the volume of sales that a larger business has. If you need to hire additional help, it will cost you more in profits than it does for a larger business.

Before setting your prices, research what others are charging and also have a good understanding of your expenses and how much you need to charge in order to make a profit.


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