Why a low price strategy is not a good option for small business owners
- Karen
- May 27, 2016
- 6 min read
Updated: Oct 7
TLDR: Offering low prices may feel like the right strategy, but it can backfire. This blog explains the reasons why and how to make sure you price correctly for the value you deliver as a small business owner.
When you’re strapped for cash it can be tempting to pay for a solution that seems to offer what you want for a ridiculously low price.
When you're strapped for cash it can be tempting to drop your prices to get business.
Unfortunately either can do more damage than good and cheaper is not the better option for anyone.
The first statement is brilliantly highlighted in a blog post I read from Dave Farmer of Lime Finance Solutions where he describes how he got tripped up by the Dunning-Kruger effect.
‘What the blooming flip is The Dunning-Kruger effect?’ I hear you cry. I didn’t know either. But it’s where incompetent people overestimate their abilities and is most easily understood by graph 1 below:
Graph 1 – The Dunning-Kruger Effect
These people have limited knowledge about a subject but believe with total conviction that they are the world authority on it. Which unfortunately can bring down the unwary. They are just so darned convincing that you end up believing them. Which means you buy their suggested solution.
Unfortunately, as described in Dave’s blog, the person who went for the ‘cheap’ option ended up coming back to Dave once he realised the mistake he'd made. He'd not only wasted time and money on the wrong product, he'd also had his options limited going forwards. A double whammy of badness! Buyer beware.
Lack of confidence can affect your pricing
The other side of the coin to this is for you as a business person trying to sell your wares. According to the Dunning-Kruger Effect your confidence drops as your knowledge increases and only rises again when you have become the expert in your field. The danger is that because your confidence drops, so does your pricing.
A low price strategy for small businesses can affect the value of your products or services
I've taken the outrageous liberty of making adjustments to the Dunning-Kruger Effect graph to show how value is perceived when you under-price to try and buy business (see graph 2 below). And what I have devilishly called the Ops Department Inverse Price-Value effect.
Graph 2 – The Ops Department Inverse Price-Value effect
The paradox, and what draws people in, is that a cheap prices seems like good value for money. They may not get what they would really like, but it kind of gets them some of the way there and if it doesn’t work out quite how they wanted it, they didn’t spend that much money on it – zone 1 in the graph above.
And at the top end, they can perceive they’re getting more value for money for what they’ve spent because a) they have to justify the expense of it to themselves b) they like the cachet that comes with having spent a lot of money on an exclusive product or service and c) they’ve actually got expert advice/service/product that more than compensates for what they’ve paid (zone 3 in the graph above).
Why offering low prices isn’t the better strategy for you as a seller
The danger zone, (zone 2 in the graph above) and the one that many small businesses stumble into, is fearing to charge properly because they perceive they are competing with cheaper competitors. The result is that the person buying the advice, service or product doesn’t believe they are getting good value for money for the very reason that it’s been under-priced.
The business ends up delivering way more value than the cheap as chips 'amateur' but it's not perceived that way. They are likely to have very demanding customers who have bought on price alone, not because they do an excellent job.
How to avoid 'too cheap' as a buyer
A good rule of thumb is, as Debra Meaden often says on Dragons Den, if it looks too good to be true, it probably is too good to be true.
Unless you are prepared to end up with an unsatisfactory solution and then throw more money at it to get it right, don’t do buy it.
Do your research before you spend any money.
Don't get rushed into a decision or panicked by the 'this offer runs out in three minutes'
Do without until you can afford a better solution.
Do a skills swap with someone who can provide you with the solution. I don't recommend you do this often as it doesn't put bread on the table and there can be challenges around working out what an equitable skills swap is, but for one off things that will really move your business in the right direction it can be an option.
11 ways to avoid pricing too cheaply as a small business
The answer is to price correctly. Simple eh?
Okay, it’s not so easy in reality when you’re beset with the fear of losing a sale. But here are some actions to counter a low price strategy as a small business that can help meaning you charge an appropriate amount and ensure your customers feel they are getting really good value for their money. Here are 11 suggestions to help:
Does what you do add value to your customers?
Ask yourself does what I do add value to my customers? Clue: Yes it does.
Work on your self-belief
This will get your confidence levels up - This requires you to get a good network of people around you who believe in what you do. Talk to them.
- Look at your testimonials and remind yourself of the good stuff you are doing. - Remind yourself of all your years of experience, knowledge, skills and qualifications that entitle you to do what you do. Write them down. Look at them often. - There are lots of excellent mindset coaches out there if you need help - Mark Franklin - The Four Fears Guy is one of them.
Have proof of how well you are doing
Ask your customers for testimonials, case studies and references that show you do an excellent job
Identify your niche
Work out who your ideal client is (and what sector they work in). They are the ones who will get the most value out of working with you, who get your worth and have no issues with paying you, at the right price. Make sure you have a unique product or service that deals with the pains and desires for that client.
Provide excellent customer service...
...from the moment they become your customer and continue throughout their life with you. This is where having, processes, systems and a CRM system linked to a mailing tool come into their own. You can personalise your contact with them, and ensure you deliver to a consistently high standard.
Have a quality product or service
Think Apple for product. Or if yours is a service industry, have a delivery model and system that delivers consistently for your customers (see also 4. Identify your niche above).
Delivery/Reliability
You deliver. On time, every time (see also 5. Provide excellent customer service).
Information
If you can provide useful knowledge over and above your products and services and act as advisers to your clients/customers, this has a huge value to them.
Social/environmental
Plug your products or services that have a positive impact on the environment or support social causes or only use ethically sourced products. Really important these days. Look at getting B Corp certification to add extra legitimacy to your claims (if and when you have the funds).
Don’t bow to negotiating tactics
If they tell you they have a limited budget, or that Joe Bloggs Inc. down the road can do it for a lot less. Stand firm. Challenge them if you dare. Ask them if price is the only consideration. Remind them of the things they want that you identified with them. If you are prepared to negotiate, never drop the price without removing an appropriate element of your offering. It may need you to...
...Get creative with your pricing
See if you can add extras in that the customer perceives as having value but that cost you very little, or offer a small discount if they pay up front, or offer staged payment terms so they don’t have to pay out a big sum in one go.
And if all else fails quote Red Adair at them – ‘If you think it’s expensive to hire a professional to the job, wait until you hire an amateur’
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