Why cheap is worse than free in services pricing

Why cheap is worse than free in services pricing

Recently, I had a chance to judge a business plan competition for one of the universities in Seattle. One of the contestants at the event was a services company that wanted to be the “Best (services type) firm in Seattle.” But they also wanted to offer cheap services to showcase their capabilities…

(Before I’m perceived as dissing all services companies, let me start by saying that I co-founded a services company, OneAccord Partners, a Revenue Consulting Firm that helps mid-market companies grow profitable topline revenue. I am still on the Board of that company.)

During the pitch at the contest, the services firm stated that they wanted to be both the “Best Design Firm in Seattle” and a cheap solution, comparing themselves to 99Designs. 99Designs provides crowd-sourced design service. It’s a great site – you can create a contest to build a logo for $99 (and up). The request is sent out to a list of designers who compete for the contest dollars. The result is you get a logo quickly for a bargain price.

In the pitch, the design firm showcased some of their work that ranged from simple to quite terrific. Because they positioned their offering as both the Best Design and a cheap alternative, I challenged them to pick either one or the other, and not try to do both! The rebuttal (and by that I mean minor argument) was that they were using the “cheap services” as the way to introduce their services into bigger clients to get the long term relationship.

I didn’t do a great job of explaining the differences between cheap and free at the time, so I thought I’d do so here.

So, you’re trying to offer your service to a new client and you’re concerned about your price point. What are your options?

  • Sell the value – know what your competitors are billing and how you compete. Then sell the value of your service compared to the competitor. This is all about your conviction level. If you truly believe you’re at market and you’re worth it, have confidence, stick to your guns and lead with the value.
  • Provide a guarantee – if you really believe in your service and your client is a big company taking a risk on a little company, you can provide a “risk reversal” where you have the risk based on a guarantee.
  • Offer a limited project for free – this will showcase the talent, but LIMIT the scope to a number of hours.
  • Discount the offer – this, as you may guess from the title of this post, is the least favorable option. You’ve shown the client that you’re willing to discount and you will not be able to significantly raise your pricing back to a competitive rate.
The best advice I ever had was from a mentor and friend, George Walther. George and I were talking about his fee and I was asking for a discount. He looked at me with conviction and said “I don’t discount. If you want a lower price, we’ll have to change the scope of the project”.
Great lesson, thanks George!

 

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