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Low Price and Diminished Value

A few weeks ago I wrote an article about the importance of charging appropriately for the services you render. The article focused on the common phenomenon of “what have you done for me lately?” and the corresponding need to charge properly (since a client’s favor can sometimes be so fleeting).

But there is actually an even more significant danger to having your prices too low. It can actually have a negative effect on the total number of individual customers we have, not just the average sale per customer. How? On the surface that’s entirely counterintuitive. Price should function oppose of volume. If we charge less, we’ll get more customers…right?

Not always.

For example, imagine there are two attorneys in town. Let’s say that they’re divorce or trial attorneys – so they’re always going to be competing against someone else. One charges $500/hr and the other charges $50/hr. Who gets more clients coming through their door?

The $500 per hour attorney.

Every. Single. Time.

Why in the world would that happen? Because there has to be a reason they’re able to command $500/hr. And if the other lawyer is even average, why are they charging so little? The automatic assumption is that there has to be something wrong.

And maybe there is. Or maybe not.  Perhaps that $50 lawyer in our example just doesn’t have good business sense or proper guidance when it comes to building his practice and pricing his services. But be that as it may, I don’t know about you, but there is no scenario where I’m hiring the $50/hr person. Especially if I’m going to trial and the person I’m up against has the $500/hr behemoth by their side. At least based on the prices, most of us will assume that guy/girl to be 10x better and more qualified than our poor, starving attorney.

And who of us would be keen on a doctor whose ad said “Cheapest surgeon in town! Cut rate cardiac bypasses!”?

Sometimes this reflects the reality and sometimes it does not. But the market is generally efficient. And the price you charge is supposed to be reflective of the value you are providing.

Obviously balance is needed. We cannot overcharge for our services. The market will not bear that either of course. But if we price ourselves too low, we’re not just losing money from our current clients/customers base, we might actually be losing out on the business of new ones.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.