starting out a new business by offering lower prices

[huggytree]

I just ran into an electrician and we discussed our prices...im just blown away at how low his prices are....they obviously below cost...he works 80 hours to make 40 hours pay w/ no profit.

he's happy...

when we discussed a trip charge he said he doesnt want to because he wants to establish a customer base first. he says that some day he will raise his prices....i feel he's about 1/2 price right now....

soooo many guys think this way....it has one big flaw...if people use a business for $50 per hour what will they do when its suddenly $100 per hour? they will leave....leaving you with no customer base.

he is choosing his customers...cheap customers....

i see this over and over in the building trades..is this common in all business?

i dont think any of them KNOW their costs.

[vangogh]

Dave I completely agree with you. I can understand what he's thinking. He's hoping to build a customer list, but he's also acquiring customers who are price sensitive and just as likely to drop him when he does raises prices later. And the customers these people recommend are likely to also be price sensitive.

The way to compete on price is to do large volume. Walmart can do that. The local electrician can't.

I think it is common for a lot of small businesses in the beginning. They don't know how or where to find clients/customers so they think being cheaper will bring business. If it does it brings the wrong kind of business. The best thing I ever did was stop working for less than what I knew I was worth.

[Patrysha]

I find it very common in the work at home industry - underpricing out of fear and lack of confidence.

I know I started out really, really low. But then with little overhead and seeing myself as just the second income...that was fine for then...

As I've learned, I've grown and discovered just how hard it can be to move up...

[vangogh]

Patrysha you're right about the lack of confidence thing. That's definitely one of the reasons new businesses, especially service based work at home types charge too low at first. I think it takes some time to gain that confidence and realize what your value is and that you are worth that value.

[Spider]

Okay. So, here you are - a new business - no previous experience as a business - no customers. You cannot get a Yellowpage ad for many months until the next printing. What is the best way to build a customer base quickly, if not to start with low prices?

[Steve B]

Good point Frederick. I certainly started out that way - as I remember HuggyTree did also (it was almost a sport on the old forum to beat up HT about his low price mentality in the beginning).

You can do a lot of things once you get established and build a reputation, but, at first, low price is one of the few things you can offer.

The electrician doesn't have to go from $50 to $100 overnight. He can do it gradually as he builds up his clients.

[huggytree]

i started out more mid priced...i knew my expenses....i kept going lower and lower until i bid a job 'at cost' and still didnt win it...i was $2k lower than my competitor (i heard he was bad mouthing me to my supply house..wondering who i was)....if $2k wasnt enough to get the builder to switch nothing else would.....so i went to where i wanted to be and i finally started winning jobs...you need to be in the 'sweet spot'...too low and the builders worried your missing something, too high and he cant afford you...

this guy is working for under cost.....he is driving around 2 hours+ a day w/o being paid.

when i started out i didnt know what other plumbers were charging...i thought it was extremely high....i thought id undercut them and win all the bids....i didnt realize the actual per hour price was like $30 less.....i couldnt find the sweet spot for a few months

ive tried giving advice to these low price guys, but have yet to have 1 listen to me...one of my other electrician friends spent $10k and flew to Texas for a class on how to run a business....he immediately came back and raised his prices by $25 per hour..i laughed at him and said my advice was free and told him the same thing.

im fighting the urge to give this guy advice...it seems to annoy people when they didnt ask for help.

[Patrysha]

I think I have a permanent dent in my tongue from holding back advice from ppl who haven't shown an interest in hearing advice. I just want to rush in and share all my knowledge...but know that it would just lead to a lot of wasted time and frustration...

[Spider]

I think it's almost a 'given.' When you start in business, you have to start with a low price. It's the only advantage you can create for yourself at that stage.

[billbenson]

There is another aspect to the low price strategy as well. For most there is a big learning curve at the beginning. Not just the service or product you provide but all the accounting, time management, marketing, etc. While working for nothing does seem kind of like a hobby business, it does provide the ability to evaluate what you are doing and has educational value.