We have seen this scenario many times: a person opens a new business and tries to become established by offering the lowest price in town for his product or service. Twenty-five dollar oil changes; graphic design work for $40/hour; painting/handyman service for $20/hour or some product selling for just above the cost to buy.
You can guess what happens: these businesses fail quickly, and seldom, if ever, continue to exist beyond a short period of time.
This pricing strategy–be the cheapest–is doomed to failure for many reasons. One is that people really don’t want “cheap”; they want quality at a reasonable price. Another is that the new business has a poor understanding of total costs, so they just don’t make any money and can’t survive.
Here are some reasons why you don’t want to have the lowest price (unless you’re Wal-Mart, and I’m assuming you’re not!)
You’ll be busy and broke
Would you rather work five hours for $60/hour or twenty for $15? Dumb question, I know. The problem with being inexpensive is that you’ll be what I call “busy and broke”; that is, doing a lot of work and making no money.
You can’t ensure or sustain quality
Imagine a person paid $400 to paint a room and one paid $150. Which do you think will tape the edges, use primer, apply two coats of paint and do a good job cleaning up after the job is done? At some point, the owner or workers who work for low wages, because the billing rate is too low, will have to cut corners to make some level of profit, even if it is a meager amount.
This is also true of products. I know the cheap tools at Wal-Mart are cheap for a reason; they are low quality, made-in-China tools. That’s the cost of the inexpensive tools; they won’t last long and are likely to be sub-optimal for anything but the most mundane tasks.
You’ll be perceived as “cheap”
Few businesses want to be known as “cheap.” When I think of cheap I think of “dollar stores” and service providers who are inexperienced and using low prices to gain experience. Most people don’t want “cheap” products or services, though low prices are appealing for some, most don’t want short-lasting products or inexperienced service providers, as we all know the long-term costs of “cheap” can be very expensive.
You can’t raise prices in the future
I sometimes hear entrepreneurs say that they’ll raise prices once they get established. This is really hard to do, as the market has already decided you are a cheap, low-cost product or service. If you’re selling shave ice for $3 and not making any money, it’s hard to convince people that the same product is now worth $5.50. Likewise, if you charge $25 for your time and barely making ends meet, going to $50 for the same level of service is not going to be very palatable your customers.
Someone will become cheaper and you’ll have no advantages
Inexpensive is a fleeting competitive advantage. If the only thing you have going for your product or service is price, you’ll soon lose that advantage to someone who has the same business plan as you. There is no moat around a business that is only inexpensive, because if you can do it, anyone else can, too.
One of my business mentors is fond of saying that he wants, in fact, needs, his suppliers and employees to make a fair profit, for if they don’t, he’ll have no suppliers and employees in the future. It is, of course, always difficult to choose a higher priced service or product, but, in the end, we all know that low costs come with a price, which can often be higher in the long term.