Pricing and the Build vs Buy Decision

According to traditional economics textbooks, you're clearly on the right track.

Your experience in the real world, however, might differ.

Being a Perfect Substitute Can Be Dangerous

I think we need to address one of your underlying assumptions.

Very rarely are what you are selling and what customers are able to do for themselves a one-for-one match. In most cases, there will be differences in quality, scope, immediacy, and a variety of other factors. As a result, focusing only on the difference in pricing might be a sub-optimal approach to pitching your services.

If, on the other hand, your offering is an exact match to what a potential customer could perform for himself, you likely have bigger problems. The reason for this is that you're probably selling a commodity. The future for small vendors of commoditized products is usually not very profitable, and, over the long term, is fraught with the risk that someone else could come along later and undercut you.

Pricing Power

It's been a while since I've mentioned my DUMB model, but knowing how your offering scores against it will be of great importance to your analysis.

• Discoverability - Just because you're cheap, it doesn't mean that potential buyers will know that you even exist.
• Urgency - Just because you can solve a problem, it doesn't mean that your ideal customer actually has a strong desire to see the problem solved.
• Mesmerization - Just because you can solve a problem, it doesn't mean that your potential buyer will believe that you can do so.
• Barriers to the sale - Just because you charge less than a firm's internal cost to solve a problem, it doesn't mean that the buyer wouldn't have to incur additional costs to hire you. Additionally, there may be strategic reasons that buyers would choose to keep processes entirely in-house - even when your offering is far less expensive.

Cheaper Isn't Always Necessary

When you focus on making your products cheaper, you often lose sight of one important fact: cheaper isn't the only approach to instant buy. Sometimes you can charge far more than it would cost for a customer to perform the work himself - and make a fortune in the process.

Many people are perfectly capable of painting their own houses, mowing their own lawns, and unclogging their own toilets. Nevertheless, legions of these able individuals pay a premium to outsource such labors. The buyers would rather not get their hands dirty or spend their time and attention on such unpleasant tasks. Others may simply lack the confidence required to perform the job.

Sometimes buyers pay little attention to a vendor's pricing at all. Those who are busy will often be forced to focus on opportunity costs instead. If a firm needs to tackle two important tasks, but only has the internal resources to complete one of them, its managers may be willing to pay a tidy sum for a third-party to complete the other job.

Conclusion

Telling potential buyers that it's cheaper to outsource your tasks to us is barely a step removed from competing on price. It's almost always more profitable to compete on superiority of outcome rather than on low a price.

As any salesman will tell you, a focus away from low, low prices allows providers to charge premium prices for their offerings.

Questions come from readers like you. If you'd like your questions answered, send them my way.