A common strategy for small businesses is to undercut the competition by charging lower prices.

For instance, if every other graphic designer you know charges $100 an hour, you figure you’ll steal business away from them by charging only $50 an hour.

Charging low prices or “low-balling” as it is commonly known is a terrible pricing strategy for service businesses for several reasons.

First, your perception that a lower price makes you more attractive to clients is not universally true.

Yes, some clients are price buyers and your low price will draw them in like moths attracted to a flame.

But there are many other clients who do not buy based on price.

These clients value other attributes such as quality, reliability, speed, customer service, expertise, track record, and reputation and are willing to pay a premium price to get them.

In fact, your low price signals to many of these buyers that you do NOT deliver those desirable attributes and that you and your services are inferior.

The low price actually turns these prospects off!

This is not theory, by the way.

Direct marketers know that, in split tests of price, the low price for a product or service often loses and is less profitable than higher prices, which generate more orders and sales.

Low prices create a perception in the client’s mind of low value.

As John Ruskin, the 19th century English critic, pointed out: “There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person’s lawful prey.”

Second, your low price attracts a less desirable clientele—price buyers—than a premium price, which attracts clients who value good work and don’t mind paying for it.

Price buyers, while the least profitable clients to work for, are ironically often the most demanding and difficult to please.

Third, in a service business, time is money.

The less you charge, the less money you make—and the less profitable your business.

Given the choice, wouldn’t you rather work for $100 an hour instead of $50 an hour or earn $200,000 a year instead of $50,000 a year?

So, if low-balling is a bad pricing strategy, where should your pricing fall in relation to your competition?

Years ago, GD, a pricing expert, gave me the following rule of thumb for setting service fees: your price should fall in the middle of the top third.

So if the lower third of service firms in your trade charge $50 to $100 an hour…the middle range charges $100 to $150…and the highest-paid charge $150 to $200…GD thinks you should aim for $175 an hour.

Why?

Well, those in the lowest third are the low-ballers. They figure they’ll get customers by offering “the lowest prices in town”.

As we’ve seen, that’s not a good pricing strategy for service providers.

The middle range isn’t quite as bad. It can make you a decent living – and win you some good clients.

But if a low price creates a perception of low quality, a middle price can create a perception of mediocrity.

Is that how you want to be seen in your marketplace?

So given that, you should charge somewhere in the top third.

In the example given above, GD would say to charge $175 per hour.

I’m a little more flexible and recommend between $150 and $175 per hour.

Why not go all the way and charge the highest price—$200 an hour?

Because at that price level, your fee becomes a huge concern to your clients.

It stretches their finances to the limit, and they begin to feel like you’re trying to take them for every penny.

Also, almost all your competitors cost less than you.

By backing off the top of the price range a little, you can still command a premium price but remove price as the foremost concern in the client’s mind.

OK. So your price should be somewhere around the middle of the top third in your market.

But how do you justify that price especially when competitors are more experienced and (perish the thought) perhaps even more skilled than you at their trade?

We’ll discuss how you can command that premium pricing, no matter who you are, in our next article.

Bob Bly is the author of “World’s Best Copywriting Secrets” and has written copy for more than 100 companies including IBM, Boardroom, Medical Economics and AT&T. He is the author of more than 75 books and a columnist for Target Marketing, Early To Rise and The Writer. McGraw-Hill calls him “America’s top copywriter”.

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