Subscription Options

July 23, 2008

Cheap begets Cheap

In the UK they have a channel called Gem TV, or the Jewelery Channel or something like that. Anyway, the premise is high quality jewelery sold cheaply. Great idea and it achieves it through cutting out the middle men. (A good idea at any time)

On night we saw a sapphire necklace there. It was beautiful with large sapphires throughout. They estimated it was valued at around $30 000 but they were selling it for around $900. I had bought from here before and taken the jewelery for a valuation afterwards and found their initial valuation to be pretty close to the truth.

So we bid for it and won it for around $950 dollars. Then the "cheap dude" in me came out. It was going to take two weeks for me to receive the necklace, not only that but I had to pay a whole $15 more for freight! I refused to do so and let it go...

What a foolish thing to do! I still would have had an asset of around $20 000 for about 1/20th of the price. But cheap begets cheap.

When you are in a mindset that is focussed solely on price a lot of previously rational thoughts related to value go out the window and your idea of what represents "a good deal" is fundamentally distorted.

If you sell services do not compete on price, compete on value.

If you go for the bargain basement prices then the clients you get will be focussed on price, and not on value. You will spend most of your time arguing about prices, justifying costs and expenses, and wrestling through even the smallest variation in terms.

We go for cheap prices thinking that we will generate greater volume. In most cases this is not true. You just generate additional work trying to satisfy clients who are determined to beat you price down even further and to argue about every single dollar that is being spent. In short, the whole understanding of the value that is being delivered goes out the window, and if you do finally get it you will never get their full appreciation.

Also, you risk venturing into the realm of negative revenue where your project becomes a loss leader for the organization. When that happens, no matter what the size of the contract, it is far better for you to not have that contract on your profit and loss sheet.

And there is another psychological element to this also. If you are debating a price, and you bend to pressure and lower it, then two additional things have occurred. 1) You have shown you will be beaten down on your first offer, and 2) the client gets it in their head that you were over charging in the first place.

So the precedent is set, the underlying distrust has been established, and there is no easy way back from here.

If you have established the value well, and the likelihood of achieving a certain level of value, then you should not have to negotiate on price. You negotiate on value. They want it cheaper, take some of the value out.