Two weeks ago we talked about how helping our customers meet their goals can also help us meet our own. We saw how doing that develops loyalty and a mutual win for both businesses.
In the comment area, Joe brought up some really good points of caution. There was mention of not taking it to extremes, or get in the business of providing pro bono work. We are in business, and have to pay for groceries just like the next person.
While I whole-heartedly believe in having an ethic of doing more than agreed upon is a success model, and which many businesses have founded and maintained their success, there are indeed some temptations to watch out for. This is especially true if just starting out.
Let’s face it, when running head-to-head with competition in a new venture, we need to find a benefit that makes us stand out differently than our competitors.
Perhaps it’s a higher quality product or service, a unique product or methodology no one else has or does, a longer guarantee, a faster turnaround, or the ever popular attractive pricing structure.
It seems freebie work or severely undercut rates are the popular baits many startups offer their customers, and the customer is more than happy to nibble away until there’s nothing left but an empty hook, only to move on to the next fishing line dangling in the water.
Trust me, we don’t want those types of customers anyway. We want customers and clients who respect us for who we are and what we offer, who see our expertise as an investment in their sales or tool of success, not something they randomly pick off the shelves of Wal-Mart.
With that said, here are…
3 Reasons to Avoid Low-balling Your Business Rates
1. Establishing precedence.
Let’s say you are just starting out in the physical training and consultation business. Your overhead is low with mostly just your time and experience as the heart of your business. You really have no expenses to meet at the end of the month, so you got some wriggle room on your fees.
You have zero customers, the phone hasn’t rung, the inbox is empty, analytics show web traffic is low, and you are really anxious to get started.
One day while standing in the grocery line, you strike up a conversation with a shopper who has been advised by their doctor to undergo some exercise. They are complaining, because they have no idea of what to do or how to start.
Oh boy-oh boy-oh-boy-oh boy! A potential customer!
You aren’t doing much anyway, so you fall into temptation of giving this person a $10 per session deal sort of willy-nilly right there, instead of the going rate of $50 per hour.
What do you think he or she will tell friends and family after you’ve given some fantastic training? It will be…
“Hey, if you need personal training, go to this person, they are only $10 per session.”
When we set precedence, we put ourselves in a box. Plus, when realization comes to raise rates and fees, we run the risk of offending and losing that customer. Not only that, the word of mouth to friends and family will now work against us, not for us.
So, what seemed like a good idea, might not be so good in the end.
We do often see reasonable introductory rates, or sometimes “buy one session get another at half off the next one,” but those are typically promoted with a predetermined expiration date or limited to the first X amount of people. There is some structure to it so people aren’t offended when it goes to regular pricing. They understand going in it is a structured limited offer.
2. Self-confidence.
Let’s say you are looking for that first personal training client, and decide to offer a freebie to your pastor, brother-in-law, or neighbor down the road. And to gain some experience you decide to do a number of those.
You might even think it’s a good idea to do freebies in exchange for testimonies you can put up on your website.
The problem with that is, in a time when you are most vulnerable in wondering how you will do in business, subconsciously your confidence could be taking a hit. You might be subconsciously thinking people are getting what they paid for, nothing. The longer you go, the more distanced you can feel from your expertise. You’ll likely begin to doubt your value. Questions enter your mind whether you are worth as you once thought.
Then, when you think of the rates you should be commanding, you might hear yourself say, “Who am I to think I’m worth that much? “It can begin to work on your psyche.
That my friend, is not a place you want to go.
It is true you’ll get some good comments and accolades, that is always nice, but the bank account is still at zero.
It is human nature to think you get what you pay for, and that belief is not limited to the customer. It can have an effect on you as well. Do that long enough, and you’ll begin to doubt your abilities and value. Eventually, your work and enthusiasm will suffer.
Am I saying to not plan for some intro work? To come out of the gate demanding the highest fees and rates?
No. There are times we enter into a so called internship, or getting our feet wet and hands dirty without full pay, but again, these are predetermined, controlled terms. We control them, not bargain hunters looking to lead us by the ring in the nose.
If you plan to develop your own internship as an entrepreneur, make it short, include it as part of your goals, outline what you will do and how much, and stick to your deadline of when it will end.
Refuse to give in to bargain hunter’s counter-offers when your internship is over, and stick to what you are worth. Know in your own mind you are consciously doing this for a reason, find your value in it, and move on.
This is where, if you are that personal trainer for example, you might offer some bonus material. Maybe you offer to e-mail them a pre-formatted training journal, a couple articles on nutrition, a report on the best times of the day to work out, or a link to videos on warm up routines.
What are we doing here? We’re helping them meet their goal with some information we have around anyhow, but not sacrificing our rates. They find extra value in meeting their goals, and you are giving up little.
In fact, you might even have it part of your business planned to give everyone that information kit as new clients, but it appears to the customer they are being treated special, because it is not promoted on your website.
3. Market pricing.
As an entrepreneur, it is a good habit to look at the extremes of a situation. Doing so really helps clear the lines of possibilities and pitfalls. Don’t hang out there, but use it for perspective.
One extreme to look at when low-balling pricing is asking yourself, “What if everyone did this? What if everyone used pricing to lure in would be customers?”
The answer is slave labor.
I’ve seen this as a performing songwriter, in the freelance writing field, and to some degree even way back when I was in the roofing game.
For instance, go take a look at elance.com or odesk.com. It is loaded with bargain hunters looking to pay freelancers next to nothing for their expertise.
And why? Because they know if freelancers are hanging out there, they are likely just starting out, or for whatever reason, are willing to work for peanuts.
For instance, writing an 800 to 1000 word case study for someone on elance.com or odesk.com might earn you $48 – $60 at $0.06 per word.
That same case study written for a savvy business owner could earn you $500 – $1500 depending on how much interview work and research goes into it.
This is a generalization of these types of sites.
The former business looks at your work as an expense, so they are looking for a bargain. They see it as X amount of words costing them X amount of dollars.
The latter savvy business owner sees your work as an investment or tool. She sees that work converting to tens of thousands of sales, so your rates are a drop in the bucket. If you deliver as she expects, the investment to profit ratio is a joke and she’ll pay you that all day long.
Or, what if you are that personal trainer. A client can look at your expertise as an extension of their doctor’s prescription, and expense an insurance company won’t pay for.
Or, they could look at it as an investment in their health. Instead of paying tens of thousands in medical co-pays and prescriptions, not to mention higher insurance rates for the rest of their life after a major health incident, they are saving money and feeling full of energy and great every day.
Realize that when we accept low paying jobs, we help to bring the entire market down. No doubt that will effect us later when we want to command pay we’re really worth. The bottom-line here is to make a calculated start up plan and follow through. Resist the temptation to work for ridiculously low rates, even when it means you miss out on that $60 elance job.
If you are going to give your work away, do it for your favorite charitable organization where you can find good Samaritan value in it and possibly a statement of value from the organization which you can use for your taxes.
Until next time…
Live like you’ll never get hurt, dream like nobody is watching, and above all… try-try-try until you succeed!
If you, say, charge $10 an hour when the going rate is $50 per hour, you will probably get way more customers than the $50 per hour bunch and, if this catches on enough, it may force the market price for the service to go down. Think of the monstrosity our medical profession has become, with the huge price increases over the years. Why have high prices when you can have lower prices and more customers, since they can now afford your services? Beth
I’m not Brad, and maybe he’ll have a different take, but setting a price structure accomplishes a few different things. First, it sets your personal value. If you only think you’re worth $10 an hour, then that’s how potential customers will perceive you. Remember marketing is all about perception. Second, changing the price in an industry is a consumer concern, not an entrepreneurial priority. If the going rate is $50 an hour, it must be what the market can bear after you factor in the amount of time and cost that goes into delivering that product or service. That’s closely related to my third point, which is pricing serves to weed out customers you don’t want. No doubt that will sound foreign for the business person just starting out, but part of the freedom of running a business is to be able to determine who you do and don’t work for. I’d gladly charge $50 an hour, maybe even nudge it up to $60 or more. Let someone else deal with customers who only want to spend ten bucks on lesser quality.
When it comes to books and such, I could be persuaded to see how undercutting prices could be a good strategy, if you do not undercut so far that you de-value your material, but if you’re working hard to deliver a good product or service, I’m always going to lean toward charging more and attracting more lucrative clients. In short, you don’t have to start at the very bottom of the ladder.
Comparing a small business to health care is comparing apples to oranges. Health care is an industry problem, now a political one too.
Good points again Joe.
I’ll add that there is a limit to over pricing of course, but that is not what we’re talking about here. I’m not sure anyone would opt to work five-times harder than they could to achieve the same amount of revenue. $10 per hour compared to $50 per hour if they could avoid it.
You can by a trash can at Wal-Mart for probably $5.99 and you can buy a trash can from some 5th Ave office furniture place for $1,400, we’re not talking either.
Large, high-volume corporations work on extremely low profit percentages. They bank on volume to carry their revenues, establish market shares, and have automated themselves so they can do that. They have huge payrolls figured in as well equipment to automate their processes.
Solopreneurs and entrepreneurs just aren’t in the position to do that. In fact, we don’t want to.
Most if not all of us, want low-overhead, little payroll if any, freedom to customize their schedules and work for who they want, and otherwise thread their lives as they see fit.
That is a much different business model than the producer of the $5.99 trashcan.
Can one price themselves out of the market? Absolutely. The key is to find the sweet spot in your line of work that puts you in the revenue you want, with the amount of work you want to do, and still allow time to live some of your dreams.
If I had a lawn service and marketed myself in a neighborhood where houses were valued at $75,000 to $100,000, how much would they pay me to mow their lawn?
Probably nothing. Probably not many would even take me up on it, but if some did, it’d be very low. People in that neighborhood can’t afford the service. They’d rather do it themselves to save the money.
So yes, if I go in and tell them $50 to mow their lawn, they won’t take me up on it. If I told them $10, some probably would.
Now, take that same lawn mower, same pair of legs pushing it around a yard, to a neighborhood where houses are valued at $250,000 to $500,000.
Do you think you’d get more work?
Do you think you’d get a higher rate for your time?
You betcha.
It’s a matter of finding your market.
You could certainly push a lawn mower around for a couple hours for $25 in a neighborhood of houses valued at $100,000 to $150,000; but why not get $100 or 125 for that same 2-hours just up the road a piece in a more affluent hood where people not only will pay more, but they don’t want to do their own lawns anyway. They are looking for someone to do it for them.
Toss in a report on their fertilizer needs and dry plant life as a heads up and they will appreciate the extra tip, and more than likely will ask if you fertilize lawns too.
Hope that helps.