Undercutting The Market A Good Pricing Strategy?
I remember a time, in fact it still exists, where a few dumb tradies undercut the market simply to get a job. In my opinion, selling on price alone is one of the most stupid pricing strategies any business owner can make, here’s why…
Just because the person up the road lowered their prices does not mean you should follow suit. Would you follow them off a cliff too? A price war will only result in no one making money. And if you position yourself as the lowest cost option, you run the risk of losing your customers when another, even lower price alternate comes along. Not to mention, the customer this type of tactics attracts is normally very difficult to keep satisfied, a person who complains about anything and everything and wants it all for nothing.
Now think about it… is this your ideal customer? NO.
So why then would you undercut the market to attract them?
Why would you offer a crazy low price just trying to keep them happy, when in fact, nothing will, and there is simply no profit in the job?
Not to mention instantly de-valuing your professional opinion, your work and the industry as a whole.
I would say you could kiss goodbye any additional money from this customer through up-selling or cross-selling. You will be lucky to break even with this sort of work and the additional stress of having to deal with this sort of customer is too much to bear!
You can have them…
In short, this form of pricing strategy will only lead to the business shutting up shop.
When it comes to pricing products and services, it is clear from where I stand, that for many small business owners it’s more a matter of guesswork than logic. Instead of undercutting to win business they need to work out the price they need to charge – a price that covers the cost of doing business plus makes all the hard work worthwhile by returning a reasonable profit.
The first step in developing a pricing strategy is to work out your overheads to include rent, wages, software, insurance and the cost of servicing capital assets (loan interest and depreciation charges), vehicle leases and your own market based salary. With your accountants assistance you can work out your breakeven rate.
Once you have identified your breakeven, you can think about how you want to price your product or service. To get a feel for the market it’s a great idea to complete a competitor analysis (found in Getting Started:Module1 page 96), though its advisable not to base your prices on this research alone simply because they could be offering a different mix of products and services and carry a different rate of overheads than you.
Equally, it’s important not to price yourself out of the market. Instead of just checking what price your competitors are selling at, evaluate the services they offer their customers and whether they market on the basis of any unique core differentiators. Then consider what you can offer. If you feel that what you can do is worth more than what your competitors offer, price your services accordingly. This is called a premium pricing strategy. For it to work, you need to be able to demonstrate your value to your customers in a convincing way and to get the message out among them. We suggest reviewing the 12 different pricing strategies within the ‘Marketing Your Business’ Module3, page 59.
Take your time when determining your pricing strategy, because, once in place, it’s difficult to change without upsetting customers. If you’re planning on raising prices, it’s a good idea to do it incrementally rather than wait for years and then slug clients with a massive price hike.
The best way to start considering pricing is to first step back and evaluate your current situation with some professional advice on how you can differentiate your product, improve your marketing and deliver great customer service. Then you’ll be able to consider a premium pricing strategy that cashes in on the things that make you different, rather than fighting it out on cost alone.
Those are my thoughts as a successful business owner and mentor to many varied tradesmen Australia wide. How about yours as a business owner?
- Join our Kick-Ass Tradies Facebook Group, for access to trade business specific conversations, tips and resources, plus a like-minded community of tradies.
- Book a 15-minute Game Plan Call with Andy, owner of Dr. DRiP plumbing and co-founder of Lifestyle Tradie, to clarify your priorities and get clear action steps.