If you’re new to this, a start-up “wantrepreneur”, cheaper is often the tempting way to go.
It’s tempting to think that because no one knows your business, potential customers will think it is inferior to the big guys, and want a lower price to try your service. It’s tempting to think that because you have no customers, the only way to persuade another customer to come to you is to be cheaper. You think you have to price below everyone else.
You might also want to price low if you’re not certain of your skills and your product as you’re starting out, as it may seem like the best way, or the only way to get customers through the door. The people and companies you now find yourself in competition with have been doing this for much longer, and they have established client bases, so being cheaper than them seems to make sense.
If you’re selling something that is truly commoditised, that is undifferentiated in any way from any other similar product, then that might be true. And if you’re only doing that to start with, that might also be true.
The problem is that being cheaper doesn’t only refer to the price you charge. As will become obvious when we talk about value capture, it also refers to your cost of supply. If you can’t supply your service and products more cheaply than your competitors, then you can’t sustainably charge a lot less than them (unless they’re making enormous profits).
What if you want to run a shop?
If your competition is a big chain of shops, they have suppliers all across the world trying to get them the best price on whatever it is they do. And they order so many they get a bulk purchase discount that you might never be able to replicate.
Will your rent be cheaper than your competitors?
No, it won’t. If you own the property, and you’re not charging your new business rent, then that’s money you could be charging someone else as rent, so you have to include a proper rent in your numbers. And if you’re not using your own property, then someone will be charging you the same rent as they charge to someone else. So, you won’t be lower cost that way.
Will your salaries be lower than your competition?
Well, you won’t have staff for very long if you don’t pay them a competitive salary.
Cheaper is really only the best option if you have a cheaper cost of supply and your product is naturally a commodity that can’t be differentiated from any other similar product.
Bootstrapping
That doesn’t mean cheaper isn’t an option, at least to start with. You can use your own property and your own salary and even your own family to start your business. Those are valid ways of “bootstrapping”, or getting your business up-and-running without incurring too much cost.
If you look around you, you will probably find lots of things that aren’t available near you at a good price that you might be able to provide. Or some people might provide a service at a price that you would be prepared to undercut.
Let’s think of an example.
Let’s say Jack worked in an industry where they have developed a skill, but to access this skill, a customer would often need to hire a bigger company. Jack feels capable doing all the things needed by that job, and so it could be a way for him to start.
So Jack left film college having done some work with a professional video and film company, and thought that the prices they charged were just too high for small companies to use. He knew a few small companies, and he felt confident enough to promote himself as someone who makes commercial videos for new products for their websites. He felt happy undercutting the bigger companies because he could do all or most of the things they could do. And he could charge less than them, while capturing all of the charge for himself, rather than his old bosses making all of the money. His customers win (he is cheaper and they can afford his product) and he wins by keeping more of the money, and getting a client base.
It is possible to be cheaper, but to do so, you must be “lower cost”. The problem, however, is that for most businesses, they can’t stay lower cost for long. As Jack grows his business he won’t have time to do everything himself, so he’ll have to pay out for hired work, which will start eating into his profits, so he will need to raise his prices. He may even end up needing to charge the same price as his old competitors.
Which is fine. Really.
Your business will already be a success by then, and your business model will already be a lot longer than one word. You may be ready to stop being cheaper.
It is absolutely not a problem to charge the same as someone else, if not more. Maybe you won’t want to do that when you start, but be confident, and understand that you will need to charge properly if your business is going to be a success.
Customers are happy to pay the same, if not a little bit more, particularly if your service is better, but first answer these questions about being cheaper.