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Why the cheaper option is not the best option for anyone

When you’re strapped for cash it can be tempting to pay for a solution that seems to offer what you want for a ridiculously low price.

When you’re strapped for cash it can be tempting to drop your prices to get business.

Unfortunately either can do more damage than good.

The first statement is brilliantly highlighted in a blog post I read from Dave Farmer of Lime Consultancy where he describes how he got tripped up by the Dunning-Kruger effect.

‘What the heck is The Dunning-Kruger effect?’ I hear you cry.  I didn’t know either. But it’s where incompetent people overestimate their abilities and is most easily understood by graph 1 below:

dunning

Graph 1 – The Dunning-Kruger Effect

These people have limited knowledge about a subject but believe with total conviction that they are the world authority on it (Brexit anyone?). Which unfortunately can bring down the unwary. They are just so darned convincing that you end up believing them. Which means you buy their suggested solution.

Unfortunately, as described in Dave’s blog, the person who went for the ‘cheap’ option ended up coming back to Dave once he realised the mistake he’d made. He’d not only wasted time and money on the wrong product, but he’d also had his options limited going forwards. A double whammy of badness! Buyer beware.

Lack of confidence can affect your pricing

The other side of the coin to this is for you as a business person trying to sell your products or services.  According to the Dunning-Kruger Effect your confidence drops as your knowledge increases and only rises again when you have become the expert in your field. The danger is that because your confidence drops, so does your pricing.

Low prices can affect the value of your products or services

I’ve taken the outrageous liberty of making adjustments to the Dunning-Kruger Effect graph to show how value is perceived when you under-price to try and buy business (see graph 2 below). And what I have devilishly called the Chameleon Inverse Price-Value effect.

dunning-2

Graph 2 – The Chameleon Inverse Price-Value effect

The paradox, and what draws people in, is that a cheap price seems like good value for money. They may not get what they would really like, but it gets them some of the way there and if it doesn’t work out quite how they wanted it, they didn’t spend that much money on it, so it’s not too painful – zone 1 in the graph above.

And at the top end, they can perceive they’re getting more value for money for what they’ve spent because

a) they have to justify the expense of it to themselves

b) they like the cachet that comes with having spent a lot of money on an exclusive product or service and

c) they’ve actually got expert advice/service/product that more than compensates for what they’ve paid (zone 3 in the graph above).

Why cheaper isn’t better for you as a seller

The danger zone, (zone 2 in the graph above) and the one that many small businesses stumble into, is being afraid to charge properly because they perceive they have to compete with the cheap competitors. The result is that the person buying the advice, service or product doesn’t believe they are getting good value for money for the very reason that it’s been under-priced.

The business owner ends up delivering way more value than the cheap as chips ‘amateur’ but it’s not perceived that way. They are likely to have very demanding customers who have bought on price alone, not because they do an excellent job.

(Click here for a related blog you may be interested in on the subject of under-pricing)

How to avoid it as a buyer

A good rule of thumb is, as Debra Meaden often says on Dragons Den, if it looks too good to be true, it probably is too good to be true.

  • Unless you are prepared to end up with an unsatisfactory solution and then throw more money at it to get it right, don’t do it.
  • Do your research.
  • Go without until you can afford a better solution.
  • Do a skills swap with someone who can provide you with the solution. I don’t recommend you do this often as it doesn’t put bread on the table and there can be challenges around working out what an equitable skills swap is, but for one-off things that will really move your business in the right direction, it can be an option.

How to avoid the Chameleon Inverse Price-Value effect in your own business

Price correctly.

Simple eh?

Okay, it’s not so easy in reality when you’re worried about losing a sale.

But here are some things you can do that can help, meaning you charge an appropriate amount and ensure your customers feel they are getting really good value for their money.

1. Ask yourself does what I do add value to my customers?

– Clue: Yes it does.

2. Work on your self-belief to get your confidence levels up

– This requires you to get a good network of people around you who believe in what you do. Talk to them.
Look at your testimonials and remind yourself of the good stuff you are doing.
Remind yourself of all your years of experience, knowledge, skills and qualifications that entitle you to do what you do. Write them down. Look at them often.

3. Have proof of how well you are doing

– Ask your customers for testimonials, case studies and references that show you do an excellent job

4. Identify your niche

– have a unique product that answers the pains and problems for that niche

5. Provide really excellent customer service

– from the moment they become your customer and continue throughout their life with you.

6. Have a quality product

– Think Apple for product. Or if yours is a service industry, have a delivery model and system that delivers consistently for your customers.

7. Delivery/Reliability

– You deliver. On time, every time.

8. Information

– You are a source of knowledge about your product and act as advisers to your clients/customers.

9. Social/environmental

– Plug your products or services that have a positive impact on the environment or support social causes or only use ethically sourced products.

10. Don’t bow to negotiating tactics

– They tell you they have a limited budget, or that Joe Bloggs Inc. down the road can do it for a lot less. Stand firm. Challenge them if you dare. Ask them if price is the only consideration. Remind them of the things they want that you identified with them. It may need you to…

11. …Get creative with your pricing

–  See if you can add extras in that the customer perceives as having value but that cost you very little.
– You could also offer a small discount if they pay upfront or,
– Offer staged payment terms so they don’t have to pay out a big sum in one go. Or be prepared to walk away…

And if all else fails quote Red Adair at them – ‘If you think it’s expensive to hire a professional to the job, wait until you hire an amateur’

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About the Author:

About Karen Espley, blogging for The Chameleon GuideKaren Espley of The Chameleon Guide works with ambitious small business owners on her Profit Accelerator Programme. She brings pragmatic and real world advice in a group setting to help her clients make a significant difference to their business through increasing profits and running a highly effective business.

Offering workshops and group profit programmes for companies wanting to reach their full potential.

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