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(From the book Pricing Web Services) by Robert C. Brenner, MSEE, MSSM ©2003 Brenner Information Group All too often, competitors appear who declare all-out war on other service providers by undercutting all other prices. It seems as though every man, woman or teenager on the planet is jumping onto the web site design bandwagon. Shop owners complain that “propeller heads” and “newbies” are giving cheap service with fancy motion and wild audio, but little economic value. Customers are getting poor work and paying next to nothing for it.
Hobbyists and newbies often give away work at unbelievably low prices. This seriously devalues the skills that professionals have spent years developing. One service provider exclaimed, “Welcome to the next great shakeout in advertising!”
As Nathan Morton writes in Computer Reseller News: “We are today in a 'take no prisoners' phase of weeding out the weak, the mundane, the imitators and the opportunist from the marketplace. We are going through maturation and the purification that comes from soul searching and a heavy dose of cutthroat competition for market share both occurring at the same time. We are pushing, thinking, shoving, cutting, focusing, listening, and inventing like we have never done before.”
As Jim Kidwell, writing in Printing Impressions put it, many businesses are whining, “The competition is killing us. They're absolutely giving printing away.”
Morton and Kidwell are both describing realities in the technological revolution that are pushing the business envelope, today. Their descriptions apply equally well to web services. We are in the midst of an information revolution that is forever changing the way we live and work. And there will be continual price wars and pain as this new world is formed.
Price wars erode the value of the work of true web professionals. With hundreds of people from all walks of life starting service businesses, web site design service has become one of the fastest growing home businesses, today. Just look at the growing number of display ads and new web sites for these professionals
The problem is that many of these entrepreneurs are not experienced at operating and managing a business. When they sink both feet into web service, they often step into a pond of business mistake quicksand. By charging low rates, they devalue the skills of “seasoned" service providers. And they erode the value of the whole profession.
Since we started conducting national surveys on desktop service pricing, we've noted wide price ranges for almost every type of service. We expected these broad price ranges to reduce as the industry matured and professionals became more experienced in the true costs of doing graphic design, desktop publishing, and web site design. This has finally started to occur in the graphic design and DTP services. But we still see the broad price range phenomenon in web services.
Most web service professionals have the skills to provide good service. And there are some who have only basic skills and experience. But there are individuals in this group who don't have a clue how to run a business. They have the skills. They don't have the business acumen and experience to survive and prosper. One major deficiency is the ability to set good prices.
The relatively low entrance fee to starting a web service business means that almost anyone can hang out a shingle and claim to be a web designer.
This is a phenomenal growth industry. Small, independent shops are finding that they can run circles around the “big guys” and provide the same or better service at less cost and in shorter time frames—as long as they have the required skills. Many do and many are.
Another reason for the phenomenal growth of this industry is that web service providers can operate anywhere. Many work out of home offices.
Unfortunately, many of these entrepreneurs don't understand their true operating costs. Whether a shop is working out of a home office, a business park office, or a storefront, rent and insurance still apply. This means that prices must be based on a sound business basis —one that covers all the known costs. Novice shop owners seldom have the big picture before they start. They also look for business without knowing the true value of their skills. Hence they advertise prices far below and out of line with reality.
Since most novices don't have a handle on their personal value, their shops barely break even or operate below actual costs. Many look at competitors to determine what to charge. Some set their prices to match those who are already “in the business.”
Others intentionally undercut all competitors. These cutthroat artists set prices far below current service providers attempting to drive everyone else out of the business arena. They try to make you and others road kill along their way. Surviving these price wars often depends on who has the deeper pockets (or street smarts).
This puts tremendous pressure on successful shop owners who correctly perceive these cutthroat service providers as sharks — willing to do any job at any price. The result is a reduction in the average price for site design and development work. It can also be a reduction in the quality of completed jobs.
Often these low price shops underbid everyone and walk away with a dollar drain built into their work agreement that actually takes money out of their company as they perform work. Yet the job has now slipped through the fingers of the price- and cost-conscious web service professional. To compete, business savvy professionals may retaliate by lowering their prices. They may stress service to the point that they often give away valuable work. Everyone becomes a loser in this pricing game. To reduce costs, good designers may cut corners and provide less quality than normal. This lowers the quality of work and lowers the value image to clients and prospective customers.
Jim Latham of Ink Spot Printing Services described the printing industry as being in a “lamentable state of competition.” (He may as well have been describing web services.) “We seem to add value, but we don't charge for it,” he says. To be a professional web site designer requires a tremendous investment in gaining technical knowledge and skills. Why then do some shops spend so much time telling customers how jobs are done? This information represents trade secrets for the web services profession.
As clients and customers are educated on the site design process, including the hardware and software used to produce quality work, these people listen and learn. Sometimes they become your competitors. Often they learn enough to browbeat you into price concessions. By intellectual indiscretion, some owners place all service providers in the customer's vise and then help these “customers” turn down the screws, jeopardizing everyone's business survival.
By not setting and holding firm on fair prices, these shops cheapen a proud and noble art, pulling all web service providers into the same tragedy. Those that go along with the crowd and lower their own prices can lead each other down the tubes into Chapter 11 bankruptcy.
Discount buyers know how to sniff out and exploit weakness within the ranks. They suck financial energy out of a price cutthroater until that shop sinks into oblivion. Then these “leeches” move on to the next unsuspecting cutthroater and begin the process all over.
As prices fall, many services tend to become commodities. This is happening today with the Internet service providers (ISPs). The price of site hosting has dropped dramatically in the past several years. This puts ISP hosting at risk of being just another loss leader. ISPs must make up for this in higher design rates, risking lower sales volume.
So how do we counter cutthroat pricing? Jeff Hayzlett, former owner of several printing shops and now a public relations expert, suggests that we jostle lowballers by inundating them with jobs. According to Hayzlett, “If a competitor bids well below cost, I'd sell [subcontract to] them as many jobs as possible. That increases my profit margin since they're doing the job for less money than I can.”
Hayzlett feels that subcontracting more business to low-price competitors eventually crushes them in their own losses. Sometimes by being awarded a design project, a shop can lose thousands of dollars just by doing the job. Passing work to those who consistently sell below costs eventually sinks them. Hayzlett suggests that you become their worst nightmare. Just be ready with a contingency plan if they fold in the middle of your project.
According to The Pricing Advisor newsletter, another strategy for fighting a price war is by reducing your own prices to near that of your competitor and waiting for the competitor to realize their true costs and losses. Then gradually raise prices on a few services to signal “It's time for a truce in this price war.”
Others hold firm and look within their own businesses, addressing wasted time and re-design work to correct errors that they caused. These owners identify these as costs that stifle their competitive edge. So they aggressively go after these expenses and work to improve their budgeted hourly costs. This lets them lower their price and enhance their competitive edge.
I feel that the best way out of this “price-only” situation is to build more value in the customer's eyes. As cutthroat prices produce razor-thin margins, keep a tight lid on your costs and specialize. As a business banker once shared: “Stick to the basics. Stick to what you do well, and the money will follow.” She was right. By keeping your focus on a specialized service (or a specialized industry) you heighten your efficiency and increase your ability to respond positively to price pressures. Become known as the best and most capable in your area of expertise. Then price accordingly.
Don't get discouraged. As web service shops come and go, rays of financial sunlight will shine on your business (and your bank account). Focus on value and keep costs constantly in mind. Then price for whatever the market will bear. Don't become known as the “cheapest price in town.” Become known as the “highest quality shop in town.”
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©Copyright 2003, Brenner Information Group, All rights reserved.
revised on December 13, 2003
