Don’t pay the psychological price of being the ‘low-price leader’

I’ve stressed the importance of finding and exploiting niche markets many times in this space. One of the biggest reasons operating in a niche market is preferred is because you can enjoy higher prices and the higher margins that accompany these higher prices.

Usually, when we discuss niche marketing and pricing pressures, we think about products. When market conditions for your product force you into being the “low-price leader,” you find yourself in a difficult position to manage over the long term.

Pricing for services

Today I want to consider pricing pressure on small business service providers. I’m going to relate a story that an acquaintance shared with me the other day that I believe many small business owners will be able to relate to in varying degrees.

This family needed some cement work done in their yard so they went to Craig’s List and started searching for contractors or handymen who would be right for the job. They found a guy who had a great price, got an estimate, and scheduled the work.

He wanted a significant up-front payment and the homeowner was hesitant. Instead, they agreed that the homeowner would pay in advance for materials.

Before the cement contractor was scheduled to do the work, the homeowner got an early morning call from him. The contractor cussed him out for not wanting to meet his request for an up-front payment and then bitterly lit into the customer for wanting to get the work done for “half” of what others would charge.

My friend told me how upset he was after the call. He figured he would have to find someone else to do the work. Later that day, however, the contractor’s wife called, said her husband wasn’t feeling well and apologized. The work got done and the results are certainly acceptable.

Two costs of being inexpensive

This incident highlights some dangers for service providers when they recklessly compete on cost. This “professional” marketed his services as the least expensive in the area. None of his clients can be blamed for how he bids projects or prices his services. However, the situation – including expectations on both sides – sets the table for trouble in the business relationship.

First, if you’re perceived as the “cheapest” service provider, you’ll attract clients whose primary concern is cost. You need to expect them to be tight with their money. In my example, we see this with when the family resisted an up-front payment. It will also lead to problems if unforeseen circumstances cause increased costs for the service provider.

Second – and this is the point I really want you to grasp – if the main way you sell your service is by undercutting all your competitors, you pay a big psychological price. Mentally, you are undervaluing yourself and this will eventually embitter you. You’ll start to see your clients as a bunch of cheapskates who are only doing business with you because they think they are getting a steal.

I believe this is what was happening with the concrete contractor. His clients are loyal only as long as he keeps working for pennies and he knows it. If he were to raise his prices, his clients would look elsewhere. He has painted, or cemented, himself into a corner.

He’s in trouble even if his work is excellent. Why? Because he has defined himself as “the cheapest.” Others will define themselves as “the highest quality” or “the most innovative” or “the most reliable,” etc. and operate within those niches.

People will only know you by the image you present, and in business, this image is presented in large part by how you market yourself – even if it’s just an ad on Craig’s List.

Don’t create an image or business model that you can’t be proud of and live with over the long term.