The easiest way to enter a service industry market is to compete on price, but it won’t get you very far. Many small businesses and freelancers figure they have to start somewhere, so why not charge less than everyone else? “We can raise our price when we have a portfolio and testimonials”, they reason.
Don’t do it.
Competing on price, especially in a service industry, is a trap. I know because I was there.
“But I’m desperate!”
I understand. I’ve been there too. But let’s look into this and see where it takes us. First, I’ll play out an example of where competing on price can lead you. Then I’ll talk about why we do it and how to avoid it.
A highway to nowhere
I’ll use the example of a web developer, but the principles can be applied to any service industry:
Imagine a prospective client contacts you. They’re looking for a cheap website. Excited that someone wants to hire you and unwilling to let them slip through your fingers, you sign on the dotted line. Sure, you realize you’re undercharging them, but it’s positive cash flow, right?
Fast forward a month. You’ve already spent 50 hours on the project and they keep asking for more. You find yourself lamenting about how little you’re being paid – and your work begins to feel like slavery. Naturally, the quality of your service (and the friendly tone of your emails) fades slightly. You deliver the project, but neither party is thrilled.
Repeat this half a dozen times over the next few months. Here’s where the damage starts multiplying.
Now, you’re busy working for 6 clients who keep trying to get more out of you while complaining about every fee. You’re not happy. Your clients aren’t happy. You’re not feeling too enthusiastic about work or bringing in new projects. Your clients aren’t feeling too enthusiastic about telling their friends about your service.
The other route? Work with quality companies that understand the importance of a mutually beneficial agreement. If they’re smart they’ll want to keep you happy because they want you to continue to be alert, interested, and proactive in service. The value of a good relationship is well worth skipping the black holes out there. But you know this. I know this. Which begs the question…
Why do we do it?
Laziness. Lower your price enough and someone is bound to hire you. Elance, oDesk, and Guru make it so easy. Just fill out some forms, list your services, and provide a (low) hourly rate and watch the inquiries flood your inbox. I have nothing against these sites. In fact, I use oDesk on occasion to outsource certain pieces of development. However, if you’re interested in growing a business or a personal brand these sites are a highway to nowhere.
Avoiding the low cost trap
The first step to avoid the low cost trap is believing that your service is valuable. The second step is the confidence to convey that belief and the communication skills to convey that value to the prospect. Sometimes this happens through subtleties in your first communication, and other times it’s rather direct. Here’s an example of a very direct approach that I used recently.
The direct approach
I received an email from an acquaintance asking two simple questions: “How much would it cost to make a basic website for my church?” and “How much would it cost per month?” Okay, this is good. Someone is interested in hiring me. However, their straight-to-the-price approach is a little tricky to defuse. Obviously, I don’t want them to hire me because I’m the cheapest (although that’s how I used to operate). I want them to hire me because they see the value of what I provide and know its well worth paying for.
The following is my response. I tried to absorb this original question, add some magic, and respond in the best way possible. After all, this first interaction is absolutely crucial in setting the stage for a long-term business relationship. The delicacy of this email cannot be overstated.
John,
Great! I’d be excited to work with your church to develop a basic website. In fact, just last weekend I just finished a basic website for a church in Danville called First Baptist Danville (http://firstbaptistdanville.com/). I enjoyed the project very much and I’m sure I would also enjoy working with your church to get something really nice and functional set up for them.
It’s difficult to give a cost estimate before talking through the project scope, but I know that’s not a very useful answer so I’ll try to do my best with what information I have. For a basic website similar to what I’ve done for First Baptist Danville, the cost would be between $XXXX and $XXXX with a monthly fee of $XXX (which includes hosting, email, support, updates, visitor tracking, and everything else they would need to continue improving the website over time).
I’m not the cheapest developer out there. In fact, I don’t compete on price. I compete on quality and service, which in my 8 years experience I’ve found to be more important than price when creating healthy, win-win relationships. I love website development and it’s my goal to provide the best possible value on every project. It’s a thrill for me!
These are ballpark figures that will change once we can talk a little more about the project. Who should I contact to discuss the project in greater depth?
Looking forward to hearing your thoughts,
Drew
555-555-5555
Now the ball is in their court. I’ve clearly communicated my value and my confidence in that value. How they respond next will determine if they’re seeking the cheapest developer available or if they just don’t know how to inquire about a website.
I’ve learned not to automatically label everyone that asks about price as a “low cost seeker”. Many people who aren’t familiar with your particular industry don’t know how to talk about your service so they start with what they know, price. The fun part is trying to lead them from the “how much does it cost” question towards more important questions like “how can your service improve our sales?”
I love this quote from Harry Beckwith’s Selling The Invisible:
People almost always can find a cheaper way to get your service – and few efforts are less rewarding than trying to compete with those cheaper ways.
I’ve given you a glimpse at how this plays out in the web development industry. Have you experienced something similar in your industry? Let me know. Do you think these principals also apply to retail/product industries? Hit up the comments below and share your experience.
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{ 5 comments }
Hello Drew,
First thanks for the amazing post. I guess it’s very important yes to answer smartly this kind of questions.
As a freelancer i try to explain to this kind of emails that i would like to have more information so i can calculate for them the Time/Cost of their website. what i normally do also is to try to get this in a meeting rather than by email.
Thanks,
Mo
Mo,
You are absolutely right – meeting in person makes discussing a project much easier. Email often leaves too much room for misunderstanding. Thanks for the comment, Mo. I just took a look around your website and your portfolio – nice work!
Drew
Meeting in person benefits you as it is harder to say no to you face to face than it is in an email. Great post. I have (and still do at times) charged less than competitors just to get the job. Your post is right on point. Thanks
Kathryn ,
I think you’re right, but instead of thinking of it as “it is harder to say no to you face to face”, I prefer to think that once you’ve met with someone you have already begun building a relationship (and people like relationships) so they are more likely to say “yes”. Make sense?
Just by meeting with someone you automatically break out of internet obscurity and into their personal world. It’s nice, people like it, and most times it works out to move forward in a business relationship. Although, face-to-face meetings are less common these days so the importance of being real through email is huge. I find myself spending 30 minutes over a single email (if its project critical) so that it comes across as clearly and as personal as possible. (Again, helping to build a relationship without the luxury of face-to-face).
I love it when your comments make me think in new ways! Thank you.
@Drew: Thanks you for the nice post
@Kathryn: face to face communication is better than emails because simply if you send the client by email saying i do a very good work for him it will sound like sales person is trying to convince him to buy this product.
but when you are in a meeting it’s a chance to talk and communicate about your work and see what they are looking for. sometimes if the client is ready and know his needs you can close the deal in one meeting. if the client is just starting you may require more than one meeting to get the project.
I would say practicing meetings with your clients is the most good thing that can happen even if you don’t get their project you get experience
Thanks,
Mo
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