I interact with small business owners on a regular basis. I hear a common complaint from these folks. They get angry when prospective customers ask for, “A reasonable price.” They say, “It’s insulting and degrading when customers ask for a low price, when it costs us so much to deliver their service.” They add to their complaint that it’s unfair that people buy from foreign, low-priced suppliers, or cheap labor, instead of purchasing their quality local services.
This feeling is perfectly natural when you feel like you’re working hard, and you get no respect from people shopping for the lowest price. However, you must dig a little deeper.
If you want to be an entrepreneur, you must understand that the “free-market” is a natural tug of war between buyers and sellers. Buyers want the highest quality for the lowest price. Sellers demand the highest price for the lowest production cost. The “price” is a compromise in this tug-of-war. If demand is high and supply is low, prices typically rise. If demand is low, and supply is plentiful, prices fall.
As an entrepreneur, it’s your responsibility to understand price pressures in your industry; and create a business model around the value expectation of your customers.
Let’s try a pricing scenario that may sound familiar.
Someone makes a post in Facebook that says, “I’m looking for a local chiropractor who can help me with my sciatica for a reasonable price.”
Joe’s Chiropractic charges $65 per adjustment. Joe knows that others charge much less. He heard of ACME Chiropractic charging $40 per adjustment. He’s poured over his business plan multiple times and he believes the lowest price he could charge and still stay in business is $60. ACME Chiropractic must be cheating to stay in business.
Joe can’t help it. After reading the Facebook post, he replies, “You get what you pay for.”
Let’s see if we can help Joe out.
First, congratulations, Joe! Joe reviewed his business plan to see what his bottom price needs to be.
Second, Joe, you must get rid of your fake belief that your competitor is “cheating”. This will only prolong your agony in the business world. The fact is that your competition is beating you. They’re finding a way to deliver their service more cost-efficiently.
Third, Joe, find out how your competition is beating you on price.
As Joe follows this advice he finds out:
ACME Chiropractic offers the $40 per adjustment fee only to patients who buy a bundle of 24 adjustments.
ACME charges $10 extra for their concierge service that includes ice treatment, and electronic stimulation. Joe provides this service as part of his $60 adjustment.
ACME rents space at 50% of Joe’s rate because they’re located in a warehouse district and Joe’s on main street.
ACME does not employee a full-time receptionist. Patients sign in at the front desk and wait for their appointment. Joe has a friendly, full-time receptionist.
Joe now has a decision to make.
Does he lower his standards to compete on price with ACME Chiropractic?
Does he sell the added benefits that his practice provides his patients?
Does he do a little of both?
This brings up the fourth piece of advice for Joe, “Don’t denigrate your competition!” It’s very tempting to say bad things about your competition out of anger. After your insults, you’ll often add the phrase, “…it’s true” to justify your contempt for your low-cost competitor.
The fact is that there are lower cost providers and higher cost providers. There are patients in this world who struggle to pay for chiropractic services. There’s no reason for Joe to denigrate his competition or his competitor’s customers who want and need this lower cost service.
This fifth piece of advice for Joe is to clearly articulate the benefits that he provides for his higher priced service. Some of the benefits of Joe’s Chiropractic will be obvious to patients. They’ll notice the receptionist, the nicer office, and the convenient location. The rest will require “educational marketing”.
Educational marketing is a way to educate prospective customers on advantages of your service over your competitor’s service. Let’s say that electronic stimulation and ice treatment makes for an easier and more lasting adjustment to your back. Joe will seek out studies that show it takes five times the adjustments without these pretreatments than with them. Joe can use social media, his website, and brochures to highlight why he uses this pretreatment service. Even the low-cost buyers will see how 5X$40 is more expensive than 1X$65.
The sixth piece of advice for Joe is to use ideas from his competition that do not diminish core values and quality of his service. For instance, Joe may benefit from offering bundle deals to his clients. It normally costs 20% to acquire a new client. If Joe sells bundles of services for discounted prices, he won’t lose profit because he’ll save sales costs. Another benefit is that his patients will follow through on regular visits because they’ve pre-purchased his services.
Let’s review the lesson’s Joe has learned in competing on price with ACME Chiropractic:
Review your business financial plan to know what your price ought to be.
Stop thinking you’re a victim of your competition.
Research how your competition is charging less than you.
Do not denigrate your competition or your competitor’s customers.
Articulate the benefits your customers will gain with your higher price.
Use your competitor’s cost efficiency ideas that maintain quality & profitability.
One final note. If you run into a prospective customer who tells you that your price is too high, gladly refer them to your lower-priced competitor. Who knows? They may see what service they get at the lower price and return to you 😊
I hope you’ve learned a little bit about price competition and why you shouldn’t let it get to you when someone asks for a reasonable price. They’re just doing their job as a buyer in the free-market system.
If it does get to you, follow the six-step process in this blog post to overcome your price anxiety as a business owner.
If you’d like to learn more about how I coach my business owner clients, please visit my website at www.mmbizcoach.com.