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Ask Haley: Should I lower my prices?

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Q: Help!  Our competitors are offering ridiculously low mark-ups.  Should I lower my prices in order to get more business during this recession?

A: Do you remember last year when Starbucks tested a new price model that offered a cup of coffee for $1?  Many people were floored by the announcement.  And the result?  Well, I don’t think the experiment worked, because I’m still seeing people shell out upwards of $3 for their Venti coffees!

When times get tough, many companies will slash prices in an effort to win business.  Sometimes cutting fees makes sense. For example, if you have a lot of cash, and can endure losses, selling at a loss is a strategy to put weaker competitors out of business.  The hope is that when the competitors go, you can raise your prices. 

But for most staffing firms, lowering prices is a recipe for failure.  Here’s why:

  • It devalues your services.  Everyone knows that there’s a correlation between price and quality.  As you reduce your fees, people may perceive that you are offering a lower quality service. 
  • It makes people think you were overpriced.  When you lower fees and do not change the level of service you provide, it sends a signal that you were charging too much before.
  • It assumes price elasticity exists.  If you took economics in college, you may recall the concept of price elasticity.  When prices are elastic, price is tied to demand, so as you lower your prices, demand increases.  But staffing is not elastic.  Just because you charge less does not mean that clients will need to hire more, so you’ll just earn less for the same amount of work.  
  • It assumes price is the most important buying criteria. To some price is important, but to others your relationship, experience with the company, customer service, website, history of quality placements, and other factors play into a person’s decision to work with you.  By lowering your prices, you will most likely only attract more of the price shoppers–who tend to be the hardest clients to please!
  • And finally (and most importantly), when the economy picks back up, it will be almost impossible for you to raise your prices.  Once you set the bar lower, clients will expect it to stay lower.  Getting your fees back can take years–if you can ever recover! 

So does this mean that the only option is to hold firm on your prices?  Lots of consultants will tell you “yes.”  But in this economy, you may see sales fall to near zero if you don’t get creative about pricing.

As an alternative to simply slashing fees, consider these options:

  1. Bundle.  Offer a discount on a group of services.  This option gives your clients “a deal” while allowing you to increase the revenue from the client.  For example, you might offer a discount to a client that uses a combination of payrolling and temporary staffing services.  Or you might offer a more advanced candidate assessment bundle that includes background testing and personality assessments.
  2. Volume discounts.  While there are few economies of scale in staffing, there are some that occur in selling and recruiting when you are selling multiple orders to the same client or recruiting for more than one person for the same type of position.  Offering a discount for volume purchases is a way to offer a discount without hurting your overall profitability.
  3. Unbundle.  Unbundle your services and offer cafeteria style pricing.  Give your clients the option to pick and choose the services they require and are willing to purchase.  
  4. Payment plans.  Offering better payment terms can be a great way to win business without cutting prices.  For example, spreading a direct hire fee over 6 or even 12 months can make your services more affordable to smaller clients.  Extended payment plans are an especially good option to strengthen relationships with established clients who are going through tough times. 
  5. Prepayment discount.  This is the opposite of the above strategy.  If your customer has the cash to pay upfront, offer a 10% discount on your services.  Or if a client has had a great year, offer to allow them to prepay for future temporary staffing and direct hire services. 
  6. Increase your value.  Instead of cutting fees, find ways to deliver higher value services.  Look for enhancements to your service offering that have a high perceived value to your clients and a low cost.  For example, you could provide an orientation program, throw in drug screening, or provide more management for your temporary employees.
  7. Throw in a little extra.  Give your clients a few “surprise” freebies to enhance your value and differentiate your services. For example, if someone orders a temp for 20 hours, give them two extra hours for training time at no charge.  One catch–when you give something away, make sure your client knows you’re giving it to them!  If your client doesn’t know you’ve done something special (and the value of what you have done), they won’t appreciate the incentive.

In this economy, your best option is to find clients who will appreciate your value.  But when that’s not an option, getting creative about your pricing–and your product–can be an effective way to drive sales without devaluing your services.

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