The Organizing Network
It is a common strategy for small businesses is to undercut the competition by charging lower prices. Especially true for new businesses, those looking to expand quickly or those who see sales deteration and loss. Don’t do it!
Think about it. If every graphic artist charges $100 an hour, you figure you'll gobble up the business by charging $50 an hour. Don’t do it!
Charging low prices or "low-balling," as it is commonly known is a terrible business strategy for service businesses Why? There are quite a few reasons really.
First, the thinking that a lower price makes you more attractive to clients is not totally true. Sure, some clients are price buyers and your low price will draw them in but I will tell you now, they will leave you just as fast! You really want to find clients who do not buy based on price but a value in the service you offer. These (other) clients value other things such as quality, reliability, speed, customer service, expertise, track record, and reputation and are quite frankly, willing to pay for it.
Fact is, your low price might be perceived of as signal that you do NOT deliver the kind of service that they are looking for and need. They might start to think that you will do anything for any old project and that you and your services are probably garbage. For these kinds of clients the low price sends them packing!
This is a fact!
Direct marketers have shown in split tests of price and service, that a low price for a product or service often loses and is less profitable than higher prices, which generate more orders and sales. Low prices, it seems create a perception in the client's mind of low value and poor service.
Second, low price attracts a less desirable clientele, the price buyer. You really want the kind of clients who value good work and excellent timely service and don't mind paying for it. Price buyers are the least profitable clients to work for and I know this for a fact based on past experience, finding them also the most demanding and difficult to please. They don’t value you or your service and think even with your lower price, that you are charging them too much money.
Third, in a service business, time is money. Time is all you really have. The less you charge, the less money you make and the less profitable your business. Think about it. Given the choice, wouldn't you rather work for $100 an hour instead of $50 an hour put in another way or earn $200,000 a year instead of $50,000 a year?
So now if low-balling is such a bad pricing strategy, where should your pricing fall in relation to your competition? A general rule of thumb for setting service fees is that your price should fall in the middle of the top third. Yes TOP third!
So if the lower third of service firms in your trade charge $30 to $75 an hour, the middle range charges $75 to $125, and the highest-paid charge $125 to $175 you should aim for $135 to $150 an hour.
Well, first, those in the lowest third are the low-ballers. They will only be project based customers going from low price to low price on every project, and by the way, you will need to quote or bid out on every project.
The middle range isn't totally bad. Might be the kind of company that needs to watch its penny’s more than others. There are some good clients in this group. Ones that will stick with you over the long run. Yet, this middle price strategy can create a perception of mediocrity. Is that how you want to be seen and known in your marketplace? Nothing wrong with being here but judge it on who the actual client is.
So given all that, you should charge somewhere in the top third.
In the example given above, we would charge somewhere between $135 to $150 per hour.
Yet why not go all the way and charge the max in our case $175 an hour? Well, if you go here, to the maximum price, your fee becomes a major concern to your clients. It stretches their finances to the limit, and they begin to feel like you're trying to take them for every penny they have. At the same time, almost all your competitors cost less than you so you are being hammered by price concerns or price objections at every turn. By backing off just that little bit, you can still maintain a solid price structure but not have that be the biggest concern in the client's mind.
Larson Notes & Satire: If you can get it I guess go for it, I myself would love to work for $300 an hour and only work say 4 hours a day rather than 100 and work for 9 hours. You need to find the right balance for you. Don’t just go steal your competition’s pricings and think it will work for you. You are not them and they not you. You have different hidden costs then they do and vice versa. Use what you can leverage to your best advantage and, don’t ignore the other things but, well don’t mention them unless they become an issue then, be ready to have an answer to whatever that might be.
And oh ya, if you think you are going to charge good old Uncle Howie any $175 an hour, think again. I am a reseller and I need to have some markup room.
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