“We need to drop our prices or we’ll go out of business!” I could hear the desperation in his voice. We’d been talking on the phone for the past 15 minutes, but I wasn’t getting through to him.
The man on the other line was a small business owner in his 30s. His business wasn’t doing well, so he brought me on as a consultant. I developed a brand strategy for the business and I took care of the company’s copywriting needs.
But my most valuable input was keeping the client (let’s call him George for the sake of anonymity) from slashing their prices. Being in an insanely competitive environment can get on one’s nerves quickly. And there’s nothing easier than reducing prices to attract new customers. Or so George thought.
“Competing on price is a race to the bottom. Even if you win, you still lose.”
That’s what I told him. He stood silent for a good 30 seconds. “So what do we do,” he asked. “We have a brand strategy. Let’s just follow it and give it a chance to bear fruit.” My answer was calm and firm. He finally listened.
We averted the crisis without dropping prices. The business is still standing and doing better than ever. Which would not have been the case if George had followed his natural instincts.
Reducing prices is like shooting yourself in the foot and then running a marathon. It’s technically possible to reach the finish line, but you’re making it an excruciating undertaking.
Think about it – when you’re the cheapest and people shop from you, they’re saying, “If there was anyone cheaper, I would go with them. Alas, there isn’t, so I’m shopping with you.”
And when that “someone cheaper” inevitably comes along, you either need to further drop your prices or risk going out of business. This is what I mean by “a race to the bottom.”
Inexperienced businesspeople compete on price because this is the only thing they can compete on. They can’t offer exceptional customer service. They can’t offer an exceptional service or product. So what’s left? Lower the price.
This is a mistake if you want to run a successful business. Your margins are thin, you’re barely making ends meet and you can hardly re-invest in your business. Not a great plan.
Low prices show you don’t value your service or product. So why should anyone else?
When I first started freelancing, I had the confidence of a skinny kid in a gym full of buff dudes. So my “brilliant” strategy was offering a high-quality service at a low rate. The rationale was I’d have a lot of clients and plenty of work. And therefore, pocket a hefty paycheck.
After I worked for 15 hours a day during my first month, I saw the flaw in that logic. After busting my ass for 15 hours a day, I still would’ve made less than people working half that. I also didn’t get paid what I was owed, and my savings took a hit. Great start!
But I still didn’t increase my prices. I believed low prices were the way forward. I was telling myself I’d increase my prices “when the time was right”. Truth is, I didn’t much believe in myself and what I was doing.
I got some regular clients early on. Who wouldn’t want to work with a guy who does a good job and charges peanuts? The work was steady but the pay was miserable. I was busting my ass and barely keeping the lights on.
My clients either couldn’t or wouldn’t pay me more. I’d painted myself into a corner. I’d positioned myself as cheap labor. Someone you hire because you need to get the job done without thinking too much about anything other than the price.
I was competing for clients who were looking for the lowest bidder. And I was competing with people who were willing to work for half my rate. Sure, they could barely produce a coherent sentence, but they were cheap.
I thought better clients would come around. They never did. Back then I didn’t know the clients I wanted wouldn’t risk hiring someone cheap.
I didn’t start believing in my work even when I wrote a couple of eBooks that generated over $10,000 each. Even when the paperback copies were published. And, no, I’m not a “published author”. I wrote these books as a ghostwriter, so they were published under a different name. And I got paid 50 bucks each. It still stings when I think about it.
But the story doesn’t end there. The moment things started to turn around was when I realized if I didn’t start valuing my services, no one ever would. So I dropped the bullshit and I started charging what my work was worth. I’m still not where I want to be, but I’m slowly getting there.
Don’t be afraid to lose sales or clients.
One of the biggest fears of any small business owner is the customer going to the competition. So they’re often tempted to drop prices. Especially when the client says, “So-and-so has this cheaper.” Most businesses try to match “So-and-so’s” price, while the correct answer is, “That’s great. Then go buy them from So-and-so.”
By showing you’re willing to drop your prices, you’re training your customers not to respect you. No self-respecting brand does this. Can you imagine marching into the Apple Store and telling the clerk, “Yeah, I can buy a Huawei for a fraction of the price of an iPhone.” Do you think you’re leaving the store with an iPhone at half price? I don’t think so. They’re more likely to laugh you out of the store.
It’s not about the money, either. It’s about respect. People don’t respect things or services they don’t pay enough for. When I was charging peanut money, I worked with some of the worst clients you’d ever meet.
Once I started charging 100x more, people actually started to respect my work. Sure, I’ve gotten better since then and this is a factor. But it’s not the only factor. I’m simply not competing on price. People who work with me do so because they want to, not because I’m the cheapest they could find.
So these days, I’m not afraid to send price shoppers elsewhere. I only work with people with whom I have mutual respect. My clients respect my work and I respect their business.
But this is not relevant only to freelance or consulting work. Whatever you’re selling, you should be offering a good enough distinction between you and the competition that there is no contest.
Don’t lower your prices. Raise your business and erase the competition.
Small business owners believe the only thing people care about is price. But if this were the case, the most successful businesses in any field would be the cheapest. This is demonstrably not the case. So don’t compete on price.
If you’re not competing on price, you should be doing things better than your competition. You should outclass them. I’m not going to get into detail here because I’ve written a detailed article about it already.
It’s not easy, but it is simple. I know it’s hard work, but this is the only way you’re ever going to be proud of your business. Because otherwise, you’re only in business until someone cheaper comes along.
Working with a small business in a very competitive field is hard. It’s one of the biggest challenges I’ve taken on as a consultant, but it’s a great way to test my mettle.
Even though his entire industry is competing on price, I managed to convince George we should do something different. We’re in it for the long haul. And we’re not going to win new clients by dropping prices.
In any industry, there’s a low-end that competes on price. The question is whether that’s where you want to position your business. If not, find a way to elevate it.
Till next time.