There is nothing wrong in being able to price low and selling at half or less than half the price as long the service quality is at least 80% of the sustained market price.Low priced services offering matching quality often tend to be disruptive to the markets and customers benefit significantly from what has to be done.
However, being simply low priced and expecting the economics and sociology to work on its own is something that will equate to having one size fits all approach to business.
Here are some common mistakes associated with pricing too low without the required planning and bandwidth.
1:1 Ratio Maintenance
If you work with developers i.e. freelancers who charge you the price or less than $8/hr; are they able to deliver a work in 1:1 ratio.
Meaning, if a task takes one hour to complete; are they able to deliver the work in the estimated 1 hour.
The 1 hour estimate can come from them, not something you as a customer will be placing.
So what happens when the task(s) take longer; like 1:3 i.e. instead of finishing your work in 1 hour, they take 3 hour?
What if you project needed 100 hours?
I had come across customers who expressed the problem of having hired someone to do a job with projected delivery period of 6 weeks and its already been 6 months, the delivery has not happened.
Why is it so?
Critical Constraints and Economic Sustenance
Businesses need capacity planning.
An idea that bases its entire success strategy around low pricing, expects to gain lot of customers, also need to have a rapid delivery cycle.
This is not possible in service industry such as custom design shops or development houses, where in custom works take much longer to shape up and reach a delivery stage.
Your original concept of acquiring customers by pricing low will work, but when you look at the end of the month billing, you will find that what you are making does not support your livelihood.
You will be forced to do either or all of the following:
- Take on more resources who are priced lower than you and are pretty much doing the same thing as you are…
- Hire resources who are inexperienced and need a lot of hand-holding, but they come in at way cheaper rates that can support your monthly revenue
- You do extreme hours of work and find no end to the time you had spent behind a project, find no support coming towards you from your time and you are always lacking in financial bandwidth to hire experienced partners
- You create partners with agreement to split on profits, but you are already running on very low profits; this cascades your problems
- You have already doubled your resources, reduced your margins and potentially agreed to any project that comes your way… with one simple method… by quoting the lowest
- Congrats! You have a become a Zombie… neither dead nor living… neither growing nor collapsing… waiting to rot…
- What happens if you are the customer who hired a Zombie company to work?
No answers required right?
So, any company that can quote the lowest may not be the best company or team to work with for the obvious reasons, they will lack the capacity… even if they had the capability.
This means businesses that need work; aiming to get the work by quoting the lowest, are not bad as long as they have the capacity in place.
We have about 100 people in our team, we have been in business for nearly two decades now; we do quote the lowest possible.
However, this does not make for anything happen for us, unless we know how we can sustain by way of executing the project and know for a fact that this will deliver the best VALUE to customer (not just the price).
For more on such decision factors, please do talk to us…
Original Post – Perils of $8 or $10/hr Development Companies