Thursday, May 26, 2011

Starting a Business - Pricing and Getting Clients

A reader writes:
If i want to turn my hobby or skill into a business, is it wise to keep my amount on the low side to remain competitive? I wonder because a lot of companies outsource internationally and I don't know how to compete with their numbers but I also don't want to sacrifice my price just so i can get their business. What would be the best way to gain customer confidence and business without sacrificing my prices?

It depends on what you are offering. If you offer a commodity (such as things you would commonly see in a grocery store), then having competitive pricing can attract new customers quickly. However, if you are trying to sell a service (such as cutting hair), competitive pricing can backfire. Here is why:

With commodities, the more that is produced, the easier it is to lower the price to remain competitive. Service does not work this way. Successful service grows by selling expertise or talent. The more expertise or talent the service offers, the higher the price it can demand. A rookie hairstylist can charge maybe $15 for a standard haircut. A professional stylist that has bookings two months in advance can demand $100 for a standard haircut. The difference isn't the service, but what expertise and talent is involved with the service. People know that they will get an amazing haircut from the professional stylist (which can be validated by the large list of bookings). The clients actually expect and want to pay $100 for the service!

To simplify:

Commodities desire to make money through volume
Services desire to make money through reputation

With any pricing model, a good baseline must be established. This is found by doing extensive research in your industry of interest. If the industry exists and is established, the research is easy (you can probably turn it up on Google). If your business model is based on a non-existent or emerging industry, this can be a bit more difficult. If you are not sure, consider whether or not your industry is a commodity or service based industry, and go from there.

If this is something you would like more information on and you are in an emerging or non-existent industry, send me a message and I can point you to some resources that may be helpful.

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