The Pitfalls of Competing on Price

My last couple of topics have raised the issue of how much one charges for their services vis a vis the service they provide. This topic really came to a head earlier this week on one of the industry forums I frequent. Seems like there’s this company offering a suite of services for a fraction of what anyone else in the industry would offer. After an informal survey, I found that just about everyone when presented with the same list of services would charge anywhere from 3 to 5 times what this company in question was charging. The thing is, this particular company is not selling on volume and their product is pretty decent. So, what gives?

Perhaps they’re afraid they need to charge low in order to compete? Maybe they don’t think there’s anyone in their market who would pay a fair rate for the suite they offer? Maybe they just want to “give back” by charging an extremely low price? Who knows? And frankly, who cares? In my humble opinion, most of us should not be competing on price anyway.

PRICE CHECK

First, to clarify, by competing on price, I mean that you heavily market the fact that your prices are lower than everyone else’s, or you aggressively use discounts to lure prospects and gain new clients. There are many businesses where competing on the price platform is a good strategy.ย  However, many of you reading this blog do NOT fit that criteria. Most of you offer a relatively customized service and are heavily promoting (or should be promoting) a unique brand.

So, here are the five main pitfalls I see the low-price strategy causes:

  1. Setting Low Expectations: Many companies low-ball in hopes of getting clients and quickly spreading the word of their services. The problem is, they’ve now set an expectation with everyone that their rates are low. All the referrals they get will be prospects looking for the same low rate as the people that referred them received. If you ever plan to raise your rates, it will take you longer to do so. The more people who get used to you at the low rate, the more people out there selling you on how cheap, excuse me, how inexpensive you are.
  2. Eliminating Your Uniqueness: Once price becomes the determining factor a prospect considers with regards to your company, you’ve essentially eliminated most of your uniqueness. Why? Because EVERYBODY can lower their price. You’re just a dollar sign now.
  3. Burnout: if you rack up a large number of jobs at a price well below what is fair (or what the market could bare), you stand a greater chance of burning out. I’ve talked to so many videographers and photographers working 80-hour weeks and killing themselves doing 50, 60, 70 and more gigs a year, by themselves (i.e. shooting, editing, etc.) Most of them could (and probably should) double their pricing, improve their marketing, and do fewer than half the gigs (which will effectively increase their profit).
  4. Usually More Headaches: My experience (and the experience of many colleagues I’ve spoken to) has been that the clients who nickel and dime you and don’t value your services as much, will be the ones who result in the most challenges. They often will be the ones who demand more (but won’t want to pay for it). The sort of clients willing to pay top dollar are often the ones who are used to paying for professionals they can trust. And they let those high-paid professional do their job.
  5. Low Balling Could Backfire: Sometimes low balling for a job could actuallyย  lead to you losing the gig. Many prospects will come to a particular job with a set ballpark in their mind as to what a quality job should cost. If you come in too low under that, you’ll be perceived as not being of the caliber company needed to do their job. If a bride has it in her head that the best photographers start at $10,000, it’s going to be hard for her to see you as the right man/woman for the job if you’re only a $5,000 photographer.

WHEN “THE PRICE IS RIGHT”

Competing on a low-price platform is best if you can meet the following criteria:

  • Your product/service is a commodity. That means, a customer can get the EXACT product or service from a bunch of other companies relatively easily.
  • You have economies of scale. This essentially means that as the number of products you sell increases, efficiencies allow you to keep production and distribution costs down. Or, you can reach a large number of customers for the same cost as a small number of customers. (e.g. selling a “how to” DVD vs. teaching each customers 1-on-1).
  • All systems go. You have systems in place allowing you to effectively and efficiently produce and distribute your product/service, while still providing top notch customer service. Strong systems will also allow you to effectively run the inner workings of the business without “burning out.” This includes accounting, project management, sales, marketing, etc.

For the record, I’m NOT talking about newbies who have to do their first few jobs for free or at a low price so they can build a portfolio. Every service based business is going to go through phases. I’m talking about once you’re well established and looking to grow.

I’m also NOT talking about vendors who offer a service that happens to be priced relatively low, but the work is commiserate with the pay. For instance, many wedding videographers now offer “same day edit” only packages. Relative to the cost of an entire wedding movie, the rate is low, but what you get is far, far less. Most same day edit only packages cost as much (or even more) than “low-ball” studios rates for an entire, full length wedding movie.

NEVER FEAR

Don’t be afraid to go out there, be bold, and charge a rate that is worth the time and effort you put into it. In the long run, you’ll be happier about the work you do, which will result in you doing a better job, which will result in a happier client.

I DOUBLE-DOG DARE YOU

For those of you who are feeling bold, I double dog dare you to double your rate for the next two prospects that come knocking on your door. Just do that little experiment and see what happens. Or, better yet, set up a separate website that offers the same service as your main company, but charge twice the rate and put those prices on the second company’s website. (Since this is just an experiment, it’s okay if you want to go ahead and get a cheap template site. I’ll let it pass this time. But promise me you’ll customize it if that second “experimental” business takes off.๐Ÿ˜‰

22 thoughts on “The Pitfalls of Competing on Price

  1. Great post Ron! Thanks for spreading the word, I always get so frustrated when I see people doing good work and not charging for it. Hopefully people will see the value in your words.๐Ÿ™‚

  2. @Steve – funny you mention the corporate gig. I think my points are even more apropos there. The very first “big” corp job we did back in ’04 was one where I almost bid half of what I ended up getting paid because I wasn’t used to making such big proposals. But, I was afforded an opportunity to see some of the other bids submitted. They were all more than twice what I was about to bid. I adjusted my bid accordingly (learning about things I could charge for that I never did before, like the time spent conceiving the idea, writing the script, professional make up, etc. If I had gone in with my original bid, I’m positive I would have lost it.

    I recently submitted a bid to a long-standing client for a job, and the CEO came back and expressed concern my bid was too LOW (I was trying to be sensitive to past jobs this client had budgeted for). The particular CEO happens to be a wise and visionary leader, so I think he realizes the important of what a powerful video campaign can do. He actually encouraged me to submit a new bid more than twice the original.

    Let me know how your corporate bidding goes.

  3. The bottom line is that you simply cannot and should not worry about competing with low bid videographers. They will get their share of jobs and in some cases, they’ll get the job you REALLY wanted, but in the long run, their credibility will be damaged in the eyes of your target market.

    Low bid videographers will almost always let the client down when it comes to overall experience and effectiveness of finished product. It may take several projects before it happens, but my experience is that is ALWAYS happens. Sure, the visual quality of the video may be great, but will it actually work to help the client achieve their goals? In my opinion, clients that hire based on lowest bid are simply wanting to hire button pushers, not producers that can actually make a huge difference to their company’s bottom line.

    Plus, if a company hires a low bid videographer, that makes it easier on me because now I know not to waste a single penny or second on pursuing business with that client. There are bigger fish to fry who will gladly pay industry standard rates and above to work with a video producer who has proven to be successful in other large scale productions.

    And, the comment you made about big company’s being concerned about low bidders is absolutely correct. A low bid often means that the business doesn’t really understand how to run their company, which could result in them going out of business or being in financial strain before the project is even complete. I have found that the most successful place to be during the bid process is upper middle although I am often the highest bidder.

    Several years ago when I chose to triple my rates, I started landing one huge corporate account after another. It’s like they were simply waiting for me to do this so they could take us more seriously. My work was always solid but I didn’t have enough confidence in the value I brought to a client’s business until then. Since then, the calls for low dollar jobs have slowed down tremendously and if a project doesn’t meet my financial goals, I simply pass on it.

    This method results in making a lot more money each month while doing a lot less work. It’s great to get paid what I’m worth instead of having to work 90 hours a week on low budget projects just to make ends meet.

    Finally, my reputation in town is “if you want it done right and are willing to pay a premium for it, Fire Eye Productions, Inc. is the company you want to work with.”

    That is the brand I set out to build almost 10 years ago and I love being the mercedes dealership in a town full of pinto service providers.

    The bottom line is that if you have to compete on price, you aren’t doing a very good job of dollarizing the value that a client will get when hiring you to produce their videos. Figure out how much your videos will make or save a business and price them accordingly. If you knew that a new customer for one of your clients would mean an additional $100,000 in revenue for them over the life of their business relationship with that customer, how hard would it be to convince your client to spend $20,000 to produce that video? Not very. But you have to learn how to get your client to believe your video will help them get not only one new customer, but several.

  4. Confidence and a big does of reality should be applied when putting together a bid. Also… I can’t stress this enough, faith in God to provide.

  5. This is a little of sbject, but was curious why my gravatar is not showing up in my post? no big deal really…๐Ÿ™‚

  6. Great post. Gave me lots of insight that I can use later on. However, right now I am in the category of the “portfolio building photographer.” Any ideas on how we can accomplish that task without lowballing ourselves out of the market…after all, your friends are likely to be some of your future clients.

    I have done a few shoots for friends, for free, volunteering my services or charging so little that it’s not even a second thought. I have two main problems afterwards…1. they ALWAYS expect free/cheap stuff…..2. they don’t take the shoot seriously (arrive late, not dressed, etc)

    Any ideas on how the newbie can evolve his/her portfolio without undermining his/her’s ability to charge more later.

  7. Ron – this is sooooo good. Keep preachin it!

    One thing that I wonder – are most of the readers of this blog in need of hearing this? I could be wrong, but I suspect that most “lowballers” are not doing enough reading of blogs like this and that’s part of the problem. They’re simply unaware of what they’re doing.

    So – maybe EVERYONE here should send the link to this post to those in your market who you feel are lowballers and encourage them to read it.

    I’m going to do exactly that RIGHT NOW!!

  8. Yes, everyone in my immediate area please double your prices…I’ll raise mine 75% and scoop up some extra business. ๐Ÿ˜‰

  9. Hey Prudence – Personally, I’d rather give a shoot away for FREE to build a portfolio rather than under charge. In the beginning I did that….gave away some portrait sessions to friends and “friends of friends”. Rather than doing it cheap, I said “normally I charge $XXX, but because I’m trying some new stuff for my updated portfolio, you’ll get this shoot for free”.

    That way, they knew that next time they wanted a shoot (supposing there would be a next time), they’d be pre-tuned to pay my “going rate”. If you give it to them cheap this time around, they’ll want it cheap next time around.

    Better in my mind to give some free up front, and then charge lots later to make up for it. Saves you from doing every shoot cheap and fighting a cheap reputation.

    Hope that helps!
    T

  10. Awesome post Ron. Really opened my eyes towards my business. Its time to rethink my approach. Thanks Ron!

  11. Ron,
    This was great to read. I love the idea of setting the bar high because it is something that we have to live up to as well.

  12. @Trevor – with respect to your question “are the people reading this article the ones who need to hear it?” Here’s why it’s good even if you DO know all of this.

    First, you can never hear it enough. How many times do we preach things we KNOW is right, but often times find ourselves not doing it. I’ll be the first to raise my hand. I don’t want to give the impression that I’m on some brand marketing ivory tower doing everything perfect. I’m in the trenches like everyone else and many times I need to go back and read my own articles to remind myself what I SHOULD be doing. So, even if we know it, it never hurts to be reminded.

    Second, you’d be surprised at how many times I write an article where I think “Oh, everyone is going to love this one. Who could possibly disagree?” Then half the comments are debates about the point I’m making. Trust me, I guarantee you there are people reading this post fuming who are in stark disagreement with what I’m writing. Who knows, maybe they’ll be the next person to comment.๐Ÿ™‚

    Lastly, as you pointed out, those of us who know it can spread the love. I’ll frequently retweet Twitter posts of other people because they provide valuable information I think my Twitter/Facebook followers should know. So, spread the love my friend. Spread the love.๐Ÿ™‚

  13. I’ve done my share of consulting with videographers and determining the right product mix, marketing strategies and pricing will be unique to each videographer and their market.

    I’ve also presented over 200 seminars over the last 20 years on the business of wedding and event videography and I’ve told many audiences if I could only give you one piece of advice that would have a positive influence your business it would be to double your prices.

    I did it 21 years ago and booked my new top package within 2 weeks and revolutionized the way I looked at business and helped me understand how people relate quality to price.

    In 20 years of giving this advice I’ve had scores of videographers thank me and tell me what a positive impact doubling their prices overnight had on their business. I also had one tell me it didn’t work for him and he went back to his old prices.

    Their are other strategies to experiment with such as capacity controlled pricing similar to airlines and hotels.

    I think Ron’s advice is good but I think you should try his advice for at least your next 10 bids. If you double your price, you may end up with half as many jobs….but that’s good. It’s the same money for half the labor.

    John Goolsby
    http://www.WeddingVideoCoach.com

  14. As usual Ron, your posts are engaging. Definitely worth a ReTweet to get out there. Thank you for the constant inspiration to stay ahead of the pack๐Ÿ˜‰

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