A common strategy for small businesses is to undercut the competition by charging lower prices. For instance, if every other graphic designer you know charges $100 an hour, you figure you’ll steal business away from them by charging only $50 an hour. Charging low prices, or lowballing, as it is commonly known, is a terrible pricing strategy for service businesses-for several reasons.
First, your perception that a lower price makes you more attractive to clients is not universally true. Yes, some clients are price buyers, and your low price will draw them in like moths attracted to a flame. But there are many other clients who do not buy based on price. These clients value other attributes-such as quality, reliability, speed, customer service, expertise, track record, and reputation-and are willing to pay a premium price to get them. In fact, your low price signals to many of these buyers that you do not deliver those desirable attributes.and that you and your services are inferior. The low price actually turns these prospects off!
This is not theory, by the way. Direct marketers know that, in split tests of price, the low price for a product or service often loses and is less profitable than higher prices, which generate more orders and sales. Low prices create a perception in the client’s mind of low value. As John Ruskin, the 19th-century English critic, pointed out, “There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person’s lawful prey.”
Second, your low price attracts a less desirable clientele than a premium price, which attracts clients who value good work and don’t mind paying for it. Price buyers are the least profitable clients to work for, and ironically, often the most demanding and difficult to please.
Third, in a service business, time is money. The less you charge, the less money you make-and the less profitable your business. Given the choice, wouldn’t you rather work for $100 an hour instead of $50 an hour, or earn $200,000 a year instead of $50,000 a year?
The Marketing Plan Handbook
Robert W. Bly
Build Out Your Product Line
Entrepreneur Media Inc.