Why competing on price is a bad idea for your business!

I’d like to share with you some thoughts on why competing on price is a bad business idea.

You see, competing on price is usually a race to the bottom. You cut your price to win the business but end up making no real profit on the sale. And this, for a small business, is not a sustainable strategy.

This short video explains:

TRANSCRIPT

Okay, so why is competing on price such a bad idea?

Well, I’d like to take a little bit of a journey into my last business, which was a web design and marketing agency. And when I started the agency, I was dirt cheap, literally dirt cheap.

Yes, I was picking up work, but I was working long hours and not getting paid nearly enough for the work.

So my business coach at the time said: “Well, you need to double your fees”.

And I thought; Gosh, double my fees, that’s a bit steep.

But the next person I had an appointment with to talk about a website. I gave her a price, which was just under twice what I was charging previously. And she just said, Okay, let’s do it.

And at that point, I nearly fell off my chair.

Cheap is usually the way to below-average customers

Now, I’m not suggesting that you double your fees, but I hadn’t spotted that I was way, way too cheap.

And I’d got crappy customers who didn’t appreciate the work that I was doing because they weren’t necessarily paying a great deal for it. And to them, it was almost disposable money. To me, it meant a lot, but to them, not at all.

And this is why competing on price is a bad idea, because oftentimes you will, as a result, attract crappy clients who only want a cheap job.

They won’t value you, they won’t value your work. And in my experience, people who want stuff done on the cheap want Rolls-Royce service for the price of a Kia. Nothing wrong with Kias, but they’re considerably cheaper than Rolls-Royces. They want a crappy-car price for luxury car service.

So what I’m urging you to do is to not get involved in competing on price. I’ve been there, done that. It’s not clever.

I got into the habit of saying to somebody, if they ever came to me and said, “What’s your best price?” I always gave them a price that was a lot higher than what I normally charge. And then went in with something like, “But for you, and if you can keep this between you and I, I can do it for X”, and that’s what I wanted to charge them. That was my regular price.

Now, interestingly enough, only a minority of people actually bought based on that, and those that did felt like they were getting a good deal.

But what I didn’t want to do was compete on price. I didn’t want to go in with a low, silly price that wasn’t going to be valued for me and was only going to help them. Because in my experience, if they ask for a low price, they’re after a cut price product or service, and you just won’t be valued as a provider.

Not only that, competing price is a way to the bottom. I mean, why would you want to slash your profits for the sake of just winning the work?

Aim for profit rather than sales

It’s pointless doing work if you’re not actually making any money on it, especially if you’re running a service where margins can be high.

But particularly when you’re selling products, because products have very fixed margins and can often have very tight margins.

So why would price become an issue? Why would you want to cut your own throat effectively just for the sake of winning the turnover?

I can promise that you might think you’re doing your business good just to get them on board as a client. But if you do a cheap job first time or you supply them dirt cheap first time, then that’s what they’re going to expect from there on in.

Just selling or doing a cheap job for the sake of onboarding a client or getting a new client is a short sighted view, because that will become their expectation.

And if there’s any difference in that, they’ll be off. They’ll be off to talk to the next mug, willing to give them the best price, willing to give them the cheapest possible deal.

Quite frankly, why would you work for no profit? You’re in business. You’re there to make a profit, whether that’s profit to give yourself a big house or profit to put food on the table.

Whatever you do, don’t compromise here, because ultimately, there’s plenty of customers out there. You don’t have to deal with what my friend Gary calls the “price shoppers from hell”. You don’t need them.

They will come around. They will metaphorically kick the tyres. How many down for the cheapest possible deal? They’ll feel great because they felt like they’ve nailed you. You’ll feel crappy because you realise you’re not making any money.

Nobody really wins except the person who thinks they’ve got a good deal. And it’s not you. And that’s not what you’re in business for. You’re not in business to give stuff away. You’re in business to make a profit.

Now, I know that some people don’t like the word profit. It’s considered a little bit dirty in some aspects. But ultimately, if a business doesn’t make a profit, you’ve just got a badly-paying hobby. Don’t go there and don’t take on board clients who will take you there. Charge what you think it’s worth to the market.

Charge a little bit more if you think it is worth a little bit more.

Go for quality customers, not “Price Shoppers From Hell”

But work with those customers who value what you do, willing to pay the price that you’re asking. Make sure they’re getting a great customer experience. They get incredible value for money, even though they might be paying that slight bit more.

But whatever you do, avoid the price shoppers from hell. Don’t compete on price. It is a race to the bottom.

Never get into a bidding match with somebody else just for the sake of winning the business, because that kind of client you don’t need, they don’t value what you do. And if they come back to you, that’s what they’re going to expect again and again. And you’ll cut your own throat, you’ll make yourself miserable, and you’ll do your business no favours if you go there.

So food for thought, I hope. Never, ever, like I said, compete on price. It just isn’t worth it. I’ve been there, I’ve done that. I know other people who’ve been there and done that, and we’ve all vowed to never do it again.

If you have any questions or comments on this post, please put them in the comments below. We always respond to comments and questions on our channels.

Want more on improving profits? Check out:

3 simple ideas to help you and your business flow (blog post and podcast)

How to spot sales opportunities in your business (YouTube video)