That’s right. I said it. I know, I know… You’re hungry for new business and it feels good to win a proposal. I know that feeling. I call it the “seller’s high,” like a runner’s high. I’m on top of the world when I win new business.
The problem is when you first start out all you want to do is win. It happens all the time. You need the work and there’re bills to pay and bodies to be nourished. These are real concerns for every new business owner. But at the same time, this can also create problems in the long term. Pricing too low early on in your business is a double-edged sword.
Here are a few of the downsides of pricing too low:
You wreck your capacity. By pricing too low, you create more work for yourself. Think about it. Depending on what your discount is to close these deals, it’s going to take a lot more clients to make a comfortable living.
For example: Let’s say your ideal situation is making $1,000 per client. Starting out and looking to win new business, you might be pitching $500 per client to sweeten the deal and get them to sign on. Now for every $1,000 you make, you have to perform TWO clients’ worth of work. That’s not good math. You constantly end up doing more work to get what you originally wanted and it’s a compounding problem. The more cheap work you do, the less time you have to do high paying clients’ work.
You set your customer up for a shock. Some day it’s going to occur to you that you’re working way too much for way too little. You gave some sweetheart prices out to get started and now you’re slammed for time. You can have the best intentions to correct this low pricing, but you risk losing clients (which may not be a bad thing, but we’ll talk about that another time). Your clients start out paying X dollars per year and now you’re trying to get them up to 2X or 3X by raising the price. To them nothing has changed, so they have to ask why should I pay more? By pricing too low, you’re setting your clients up for a shock when you try to move them to a higher price. Avoid this by pricing purposefully from the start. (I think Ron Baker has the rights to “pricing on purpose” which is why I didn’t say that.)
You decrease the quality of your referrals. When you price too low, it pays poor dividends. If you do a great job for John Smith, he might tell some friends about it. That sounds like good news, until he gets to the part about how much he’s paying you. Then when John refers some business your way, this is going to come back to bite you.
From your point of view, it’s an exciting prospect. John must’ve had some great things to say about you. So you give them your best pitch with a solid price – determined to make up for those early days of pricing too low. Then you get to the end of your pitch and the person goes, “Wait a minute, John said he only pays half as much as that. What gives?” Don’t blame John. Blame your pricing.
To save yourself from future headaches, before your next proposal, take a minute to reflect on the value you’re bringing to the client, not what you think it will take to win.
Bryan is a recent cliff jumper looking forward to running a firm his own way. He aims to catalog his experiences here for future generations of cliff jumpers to learn from. Starting in January 2015, he will also be the Visiting Instructor in Accounting at Assumption College located in Worcester, MA. Bryan is also the co-host of a new podcast, Ctrl Alterego, which follows the saga of two new businesses in different stages of development. He has joined forces with Barrett Young of The Green Abacus for this adventure. Follow along atwww.ctrlalterego.com.