Don't Price Yourself Out of Business
Don't Price Yourself Out of Business
I have written before and I appreciate your answers. I have another situation that you might be able to help me with. I own a limo company. Another company has started a competing service with much lower prices. I pride myself on providing top-class service. I have lost some business and I fear losing a lot more because of my competition’s low prices. Should I try to undercut them to save my current clients?
Thanks - Joel
Proper pricing is critical to a healthy and competitive business environment and remains one of the most important issues for businesses both large and small. How you price your products and services should communicate both the values that you have to offer your clientele, and the vision that you have set for your company. Many companies set prices by what their competitors are charging without looking at the complete picture of their own companies.
A point to consider is an observation that I made about 20 years ago while owning a travel agency. Shortly after airline deregulation a new airline appeared called Peoples Express. The airlines claimed that if the frills were removed from the cost of flying it would allow travelers to save money on air transportation. They priced roundtrip airline tickets at $49 from Pittsburgh to New York City and $69 from Pittsburgh to Florida. This idea of “no frills” meant no pre-assigned seating, no reservation and no meal service on the aircraft.
The price represented a huge savings. Other airlines were charging around $300 from Pittsburgh to New York City and approximately $450 to destinations in Florida. Immediately air carriers started dropping their prices to meet the Peoples Express price.
It seemed hard for me to believe that the “frills” cost $200-$300. But there was no evidence that the airlines stopped to evaluate their actual cost of doing business. And, so the pricing war began.
One day during this time, my husband came home from his office and announced that a buddy of his, who was considered by his friends to be a genius in investing, had suggested that we invest money into Peoples Express Airlines. My immediate reaction was: “NO WAY.” I asked him to consider if he thought it was at all possible to be able to fly to New York cheaper than driving his car there. After some consideration on his part the subject ended.
Not long after Peoples Express went bankrupt and the major airlines’ competitive pricing war wreaked havoc on the air industry.
In the meantime, an airline surfaced known as Southwest Air. They agree with the “no frills” flying idea. They did the smart thing and figured out the real cost of doing business with the perks removed. And, today they are still providing service to customers and profits to their bottom line.
Also take a lesson or two from the hotel industry. You don’t see them caught up in price wars. When you stay at the Four Seasons the cost of all of their amenities are factored into the cost of your room. So if you don’t need the pool, sauna, complimentary copies of the national newspapers, gourmet restaurants, gym, and the chocolate placed on your pillow at night, along with many other features, you can find a “no frills” priced property at the Days Inn.
I agree that you should be competitive. But don’t price yourself out of business. Take time to evaluate what it actually costs to do business, including overhead. Learn more about the wants and needs of your customers. Do they want “bare bones” and “no frills” service? Or do they want the extra services that your company offers? Once you know the needs and wants of your clients give it to them at a price that speaks to the value of the service.
It is okay to scale back some of your services once you know what it costs to do business. And if you have customers who insist on the services that you cut, you can negotiate a price for them that would include the services that suit their needs.
An important lesson to be learned from companies like Southwest Airlines and the hotel industry is that, while their pricing is competitive it also communicates both the value (what you get for your money) and the company vision ("luxury" like the Four Seasons or a "no frills” stay at the Days Inn).
Read other business articles by Gladys Edmunds