Competing on Price

Monday, October 27, 2014

It has become very fashionable to tell folks to avoid competing on price. I've heard this at networking events, in entrepreneurship articles - even over business lunches. I hope you've been ignoring this advice and all those who offer it.

They are right that charging too little can lead to disastrous outcomes, but competing on price does not imply that one must charge low prices.

Price is a crucial aspect of any business strategy, but strong pricing does not, in any way, imply a race to the bottom. Charging higher rates allows companies to separate themselves from the masses who are unable to compete on other aspects such as quality, speed or customization. Higher prices signal to potential clients that you're a professional and your rates will allow you the time and resources to perform professionally and produce professional work products.

Sure, higher rates will cause some potential clients to select other vendors. This is a good thing. Clients that select solely by price are undesirable because they will treat their vendors as replaceable cogs. They'll be ready to switch to new suppliers as soon as a firm with a lower cost structure appears (even if its output is significantly worse). One has only to look at formerly healthy companies such as Vlasic Pickles to see the damage that low pricing strategies can do.

When I moved to a new part of the country and needed to find a dentist, I didn't search by price. I knew from the outset that I'd rather spend money up front for good dental work. After all, a somewhat larger charge to my credit card would be a lot less painful than even a single root canal or filling. My dentist thinks I'm a wonderful client and goes the extra mile because I'm paying a reasonable rate for his time. Both he and I come out ahead because neither of us is selecting the other based upon low prices.

There are times to price low. Such actions can make economic sense, for some edge cases, but pricing low across all products for the long-term is a recipe for disaster.

If you want to learn more about pricing your software products or services, don't forget to check out my book Charge Like a Rhino: The Software Pricing Handbook.