Leading Entrepreneurship

Falling victim to your urge to under-charge will hurt your firm, every time. Why? because there is no real good way to under-price your competition. If they’re game, they will also drop their prices until you are no longer in business. Picture two millionaires at a charity auction, fighting for the top spot. Pride could keep things going for quite a long time.

And even if your competition is not willing to fight for the bottom spot, what did you actually win? Will your clients respect you more for charging them less?

Let’s talk about what actually allows you to drop your prices in the first place. First, the costs of the items you sell have to be cheaper than your competitors for this strategy to work. If you’re a service, how might you justify your costs to provide are cheaper than someone else’s? If you provide a service, like Wal-Mart, you have to constantly beat up your vendors to get the best price, or have a secret that nobody else in the world knows about.

Second, and keeping in line with this thinking. You’ll have to let a bunch of things go. All of the niceties that your customers would like to have cannot be afforded by the cheapest provider. No frills, no extra service. Just the basic commodity.

Why? The lowest provider simply cannot afford any additional overhead. No extra staff, means less help. Minimal salaries, means minimal support. The cheapest rent means the less attractive rented space. The cheapest vendors mean more defects.

The list can go on and on.

You’ll have to let lots of stuff go… do you know which stuff you can let go? And where will the efficiencies you need to create come from specifically?

Ever hear a consultant say they’re charging less because they don’t have overhead?

Let’s look at this for a second. Assume two independent consultants. Both generate $100,000 by billing 1000 hours each year. One has additional rent costs of $5,000. The cost difference if $5 per hour. Would you seriously notice or care if your consultant charged an extra $5 an hour?

One step further. Assume you are a third consultant in this situation. You charge $50 per hour, but would also need to bring in $100,000 per year. You’d be working twice as hard for the same paycheck!

Which brings us to our last point, thinking that if you have the lowest price, you will sell more. This may have a hint of truth in it, but most firms don’t survive long enough to find out.

Two firms have the same costs of doing business. One sells a product at $10, with a $5 gross profit. The other sells the same product at $8, with a $3 gross profit. How many would each have to sell to get to the $150,000 each has to raise to cover costs? The $10 firm gets there in 30,000 units, the $8 firm gets there in 50,000. That is around 100 more items every single business day.

In the example provided, one firm, with presumably the same marketing budget, has to sell 67% more than the other. Gut check: Is price the most important thing to the targeted clients?