#43: Don’t Compete On Price

SAM: Hello and welcome back to another episode of the lazy entrepreneur, we’re your hosts Sam and Emma Priestley.

EMMA: Hello.

SAM: And today I wanted to talk about the race to the bottom and why you shouldn’t compete on price and I think I can say that as a sweeping statement. I never have ever done a business where I should have gone cheaper.

EMMA: That’s a pretty bold statement.

SAM: It is a pretty bold statement, do you know what I mean by competing on price?

EMMA: Does it mean that you’re not just gonna look at all your competitors and then price slightly lower than them?

SAM: Yeah pretty much, it goes a little bit beyond that, that instead of just pricing yourself the same with your competitors or trying to beat them on price, you will probably want to actually price yourself a bit higher, especially when you’re starting off. You don’t really know who your competitors should be so the companies you’re looking at probably aren’t really your direct competitors at all but that’s all the sort of stuff we’re going to cover today, and what I want to do is I’ve got three different types of businesses I want to talk about, businesses that we’ve run ourselves, either of us, and then talk about the different things that come into play about why on each time it’s best not to compete on price. So first off, I want to talk about freelance marketing. Freelance marketing or any sort of service or consultancy based business this is a business that Emma started, this was her first one when she left corporate life, she became a freelance marketer selling her services on upwork or freelancer or other websites like that. Second business I want to talk about is Pipehouse Gin which is our craft gin business where we obviously have a product, we sell bottles of gin but this is also true for any other kind of generic product based business such as my table tennis business where we make table tennis bats or any one of the hundreds of Amazon FBA businesses out there. It’s also important not to compete on price and now finally I want to talk about a coffee shop I used to run and similar strain, your supper clubs that you still do run. You’re selling a product but it’s an immediate product in a physical location, so three very different types of businesses.

EMMA: Sounds good.

SAM: So let’s start off with freelance marketing. So for each one, I’m gonna go through what I think are the five reasons why we shouldn’t compete on price. And then explain each one, so for freelance marketing, unless you can’t win the race to the bottom, that the price indicates the quality and the expectations that people get from it. That you’ll probably want a bigger margin than you originally expected. That everything is going to be more expensive than you think. And finally it is easier to reduce your price than to increase it. All right that was rapid so doesn’t matter if that went over your head, just to give you an over line of what we’re going to talk about. So freelance marketing, first off, I want to say you can’t win the race to the bottom and this was particularly clear with freelance marketing where you’re in this open marketplace with hundreds if not thousands of thousands of other people all competing for the same customers, and really all you’ve got to show for it is your profile which might have a picture of you, a little portfolio of what you’ve done before, some reviews. You have the previous work you’ve done before and then the price that you’re charging.

EMMA: Yeah.

SAM: And so you were up against people from developing countries who were charging five dollars an hour, you’re up against people in developed countries and in similar areas to you who were charging anywhere from twenty five to fifty dollars an hour, and then also a few really expensive people who are charging anything from $50 to $500 an hour, so starting off you went straight for that higher bracket is what you priced yourself. Do you know why you did that?

EMMA: Well because I’d had quite a lot of experience in marketing and I wanted to appear to have high value so that I could be doing consultancy work rather than the kind of nitty-gritty hundreds of hours of marketing admin. I wanted to do the advice side and the strategy side.

SAM: Yeah, which is what you ended up doing. So you’re saying price indicates quality, they’re not gonna hire you for data entry when you’re $75 an hour, whereas they might hire an expert marketer for $5 an hour for data entry. Also, likewise I think one of the reasons you did it was also that you realized that there were people out there who were willing to do it for cheaper than you were.

EMMA: Yeah and that’s fine.

SAM: And that if you decided to compete with them on that price, you wouldn’t win.

EMMA: Yeah I didn’t want to.

SAM: And if your client was looking for the cheapest person, they could go to someone who’s not you.

EMMA: Yeah and that was fine by me.

SAM: It’s a weird thing. Often the best clients to have are the ones who aren’t that price conscious. If you’re only working with the people who were trying to get it for as cheap as possible, you know probably gonna hit issues at some point. So when we talk about that we’re in a race to the bottom, we talked about price indicating quality, that when people are shopping they only really see price and that they’re gonna hire you for your strategy side and actually the overall consulting stuff rather than than the cheap jobs. Let’s talk about how things are going to be more expensive than you think. So freelance marketing is something where you don’t think there are any expenses, it’s just you. So when pricing yourself, you’re saying $75 an hour, it’s quite easy to then compare that to what you would get paid in a normal job.

EMMA: Yeah.

SAM: And say well I got paid forty pounds an hour then, or forty dollars an hour then maybe I should charge forty-five dollars an hour for my freelancing. Or maybe you think the opposite, maybe I should charge a bit less because I don’t have a big name company behind me.

EMMA: Yeah and I’m thinking about expenses, I didn’t often have an office and didn’t really commute to work.

SAM: Yeah you didn’t have any expenses that you might associate with a business. But what you did have was a huge expense of time spent finding clients.

EMMA: Yes, the new business side was very time-consuming.

SAM: Yeah, so what do you reckon maybe half your time, maybe even more than that was actually spent finding clients versus actually doing the work.

EMMA: It just scaled like I don’t even know how long I was doing it for a year and a half yeah I don’t know to start with the first three months, most of my time was spent on new business, whereas if you look at the last three months, hardly any time was spent on new business. So you had to invest the time upfront to build your client base, and also I had repeat customers, so towards the end of the year and a half, I didn’t have to do as much new business.

SAM: The other expense that you have is stuff like bad clients who might not pay you.

EMMA: Yeah.

SAM: Or clients who might say that you haven’t delivered what they wanted to, and then basically force you to work extra for free.

EMMA: Yeah.

SAM: Or extra work around this such as interviewing or having the post contract chat.

EMMA: Yes.

SAM: All this kind of stuff you haven’t really factored in that are actually expenses just because you’re not paying for an office or paying for staff doesn’t mean you don’t have expenses as a freelancer, as a one-person business. The next one I want to talk about was you were on a bigger margin than you probably think. And that’s I think true for this one, it’s more true for some of the other ones we are going to talk about, but generally when starting a business, people look at how much they’re gonna make to make a profit. So they might say for this $75 an hour, you’re going to be making $75, so then they do some quick maths and they say, “Oh well in a week I’m gonna work this number of hours and then at the end of the year well, when I want to work I want to earn the equivalent of my old salary so I want to earn whatever is $70,000 a year therefore…” and they kind of work backwards. They say this is how much I want to earn, therefore this is how much I should be charging. We’ve already said your expenses are going to be bigger than you think they are, but also you’re the number you’re probably going to sell and the margin you make doesn’t really… those you can’t really do that math.

EMMA: No definitely not for freelancing. I mean I had no idea how much business I was gonna get in the first few months let alone the first year so I didn’t even do those calculations because I wouldn’t even know where to start.

SAM: Yeah, yeah and exactly. You don’t know how much business you’re gonna get. That’s true for product business, that’s true for freelancing.

EMMA: To me I always thought something was better than nothing, which isn’t really a very positive outlook on what a new business, but that’s how I started.

SAM: And then finally I want to say that it’s easier to reduce your price than to increase it. So if people know you’re charging a certain amount and then you up it, so let’s say you have one client and then they come back for some repeat work, it’s quite difficult then to tell them the price has gone up and you can’t do it, but then they might say no.

EMMA: Yeah, yeah whereas I had a very full on client for 3-4 months where I had quite a few billable hours per day and therefore I gave him a discount after the first month because actually the work that I was doing was quite a lot of their admin stuff.

SAM: Yeah.

EMMA: But he wanted to pay, he wanted me because of my expertise in his area of business but because he was guaranteeing a certain number of hours a day, it meant that I was then happy to negotiate with him.

SAM: And he feels good because he’s getting a deal.

EMMA: Yes.

SAM: Which is the other thing because some people just love to negotiate, and so by having that flexibility to reduce price if needed, you get to indicate the high quality that you’re selling by having that high initial price but then also still get customers who are then feeling good about it by having a reduced price. If we talk about a bit more in our in our next business, so that’s freelance marketing, let’s move on to to Pipehouse Gin, our gin business. Let’s hit all these these five categories again. So first of all the race to the bottom, what it should be obvious with a craft gin business. We’re up against the biggest companies in the food and drink world. A lot of gin brands are owned by just a handful of companies all of which are going to be able to produce gin much much much cheaper than we can.

EMMA: And it’s so much more scalable as well the quantity they can produce.

SAM: They can do unbelievable quantity and they can also they can also take lost liters in order to win the race to the bottom. So there are a lot of companies who will purposely lose money on a line in order to take a large chunk of the market.

EMMA: Yeah.

SAM: That’s just not something we can do. We don’t have millions invested, we don’t have the scale, we just can’t beat those people on price. The other thing to think is that we’re not really competing against them, so when we start off, so we our first product is an earl gray and cucumber gin and so a lot of people think that we’re competing with Hendricks which is another cucumbery gin, but we’re not really, we’re double the price of Hendrix, we’re artisan, we’re totally different marketplace.

EMMA: Yeah we’re small batch.

SAM: We’re small batch. Yes we can’t possibly compete with price, and we can’t we shouldn’t really try. So that’s true for the ones like those big brands and it’s also true for the kind of artisan but the first wave who are now really big, so there’s a bunch of other gin brands who were going in at the sort of 30 pound price range, to 35 pound price range, and one of the problems we have when starting is there’s a few other smaller gin producers around, and with our pricing that we were selling to bars and restaurants and stuff was hired than theirs.

EMMA: Yes.

SAM: So they were saying, well I’ll just go to this person because they’ll do it for cheaper.

EMMA: Because they’re another local gin.

SAM: Because they’re another local gin, and one of the reasons they were cheaper we found out is that they purposely found what our pricing was and lowered it a little bit, so if we started competing with that, we just hack away each other’s margins. Reduce the price and none of us are making any money and they can do it, they got more investment for us so they can take a loss for longer, they’ve got bigger capacity than us so they can afford to do it and they’ve been around longer than us. But we’re not trying to compete with them, we’re not trying to compete on price with them, we’re trying to compete on quality.

EMMA: Yes.

SAM: And when they’re going in cheaper than us and dropping their prices and we’re holding firm our higher price selling well if you want it that’s the price, that indicates a quality.

EMMA: Yeah and it supports our really strong branding as well which is really important to us.

SAM: Yeah and it’s something that is paying dividends cause there’s a lot these places who will now will only pay that reduced price for our competitor but will still pay us the higher price.

EMMA: Yes.

SAM: And it’s hard to go in with a price that’s higher than the other people in your industry so for us for the other artisan gins, but we had to do it and we’ve still got sales and it meant that we were able to build a viable business that earned money from day one, rather than something that didn’t really work and that’s because you’ll probably want a lot bigger margin than you think, and this is a good case of that whereas we could have reduced our prices but then we would have only been making one or two pounds a bottle.

EMMA: Yeah.

SAM: How many bottles of gin do you need to sell in order to make one or two pounds of bottle?

EMMA: And the other thing is you can’t reduce your price for one customer because they all talk so it would mean you’d have to reduce your price across the board. I think to put it into numbers with gin, for the hundreds of bars and restaurants we’ve approached, off the top of my head there are only two that have not taken our gin on price. Everyone else has taken it. So it’s a very small percentage of business loss we’ve had over the the higher price.

SAM: Yeah.

EMMA: Just a price alone.

SAM: And it’s worth paying mind, when we’re selling gin we’re literally going door-to-door to talk to the bar owners, and if we were only making one pound the bottle and we were only buying six bottles, we would not be able to justify it out.

EMMA: No.

SAM: So even though we are losing out on a few customers who might have bought it if it was cheaper, we wouldn’t be doing that, because we wouldn’t get those customers at all because it wouldn’t be worth us going door-to-door. It wouldn’t be worth us paying sales representatives to go do that. Next up will be it’s more expensive than you think. That’s definitely true about gin when we first did our back of the napkin margins and worked out how much we’re gonna make, we missed out a bunch of things. We didn’t appreciate that we’d mess up the box sizes when we bought our first boxes and have to throw away the 500 boxes. We didn’t appreciate how many breakages we’d get on deliveries.

EMMA: Yep.

SAM: We didn’t appreciate something stupid, it was VAT, we didn’t realize we paid VAT on top of alcohol duty.

EMMA: Yes.

SAM: Which cost us an extra two pounds a bottle.

EMMA: Yeah which is unbelievable that we have to do that.

SAM: It’s tax on tax, it just turned out to be more expensive. Same with the sales, we have to pay for advertising, we have to pay for representatives to go in, we need to give away a lot of free gin, a lot of free samples to get the sales, kind of expensive because we’re not that experienced in this tough business we weren’t really able to predict properly. And then finally for the gin is that it’s easier to reduce your price than to increase it, so this is an area where we kind of messed up a bit.

EMMA: Yeah.

SAM: With Pipehouse Gin, we went in at the top end of what the artisan market was currently charging which turned out to be lower than we should have done. We should have just been

EMMA: confident

SAM: confident enough and just charged more than everyone else.

EMMA: Yes.

SAM: Because what then happened is six months in we had to go round and up our prices and when we have lots of regular customers that is a really difficult conversation that has to be had with each one in particular telling them to raise the price, and since raising the price it hasn’t been any more difficult to get new customers than it was before when it was 2 pounds a bottle cheaper but we shot ourselves in the foot by having going in at a price we thought was right. We should have just gone in higher it is something else we did where we did we got correct with with table tennis, so when I first started my table tennis business there was one other competitor who was selling similar products and in fact they were the ones who kind of inspired us to start because I’ve seen this great product and they were selling it dirt cheaply, they were selling it for about 12 pounds a bat. We thought that is ludicrously cheap, it’s the only thing on the market, we think we can do it better and so when we started up we initially priced our bat at about 25 pounds, so over double what they were charging.

EMMA: Bolshy.

SAM: And outsold them pretty quickly because people don’t expect anything good from 11-pound bats, they were by having the price so cheap they were damaging the reputation.

EMMA: Yeah it almost almost sounds like it’s a disposable thing. You use it once and throw it away at that price.

 

SAM: And then after about three months of selling, we upped our price to 30 pounds and found that actually sales didn’t really get affected at all. If anything it went up slightly, we found like the sweet spot between how much we we’re making per bat and sales and margin that was perfect for us.

EMMA: So it’s interesting, I didn’t realize that it happened with the bats so it’s interesting how there’s two businesses that you’ve run and that had that price.

SAM: Yeah well with the bats, we upped it not because we weren’t making enough and we had to do it but because we thought we could up the price because we experimented with new market and what we did is we did a bit of them because was mainly sold on Amazon and online, we could do effectively A/B testing where we offered a few different prices and then we could test, we can analyze by how the sales were affected from each one. And bear in mind if you go from 25 quid to 30 quid, that extra five pounds is almost all profit.

EMMA: Yeah.

SAM: Because all your margins are really taken care of so any extra you can put up, it’s great and is extra profit.

EMMA: Wow, what a nice place to be.

SAM: Which is something you can do on our online business like that, but you can’t do when you’re going door to door, selling bars locally where they’ll talk. You can’t give each of them a different price.

EMMA: Or selling at a market stall.

SAM: Right, you can’t give one customer one price and the next customer another price, so it’s something which you could use your common sense about it. But generally yeah set it as high as possible and then pull your prices back if you need to. And then the final business we wanted to talk about was a coffee shop or your supper clubs. So I started the coffee shop in London, it was called The Wren Coffee and next door to it was Pressed Manger who’d sell filter coffees for one pound a cup.

EMMA: How do you compete with that.

SAM: How on earth do you compete with what must be a loss leading thing.

EMMA: Oh yeah.

SAM: Obviously we can’t win the race to the bottom with them, and in fact we were then comparing ourselves to the other artisan coffee shops, places like Taylor Street barista and Caravan and Workshop and what we should have done, but we didn’t do is we should have priced ourselves above them.

EMMA: Yes.

SAM: Because we were in a better location, people aren’t as price sensitive as you think they are. We were the only artisan coffee shop within a walking distance where we are, so we had the market cornered but we didn’t, we just went in at the same price as what they were charging. Again this is another one, it’s easier to reduce cost tham increase it, and six months later we upped our prices and that was really difficult and we actually lost quite a lot of customers because of it.

EMMA: Wow.

SAM: And these customers wouldn’t have bat an eyelid if it had been a high price to start with, it was the upping the price they didn’t like. That they came in one day and it was one price and came the next day and they’ve got the exact change and then they can’t afford it.

EMMA: Yeah.

SAM: It was very difficult, so you can’t win the race to the bottom, it’s easier to reduce price than to increase it. Price indicates quality if I’m a coffee snob, which I am.

EMMA: Yes.

SAM: But might not know much about coffee like definitely I was in that situation at one point, where as long as it looked good I thought it was good.

EMMA: Yeah you like the look of the branding.

SAM: Then I’m gonna be looking at that three pound flat white, I’m thinking that’s gonna be better quality than the one pound filter coffee sold next door. Coffee’s a weird one though because you can go to Starbucks and pay 5 pounds for coffee that is much worse than what you get in a coffee shop, so I still I think the artisan coffee market has priced itself quite badly.

EMMA: Yes.

SAM: And we’ve been to countries where the coffee is more expensive and the cost of living is cheaper.

EMMA: Yes.

SAM: So I think in London in particular, coffee it’s a bit too cheap and it is going up and that’s another reason why our business never made any money because it’s very difficult to make a really good quality artisan product for two pound fifty and make any money out of it because you want a bigger margin than you think.

EMMA: Because it’s not just the cost of the cup and the coffee beans and the milk and the water, it’s everything else around it.

SAM: Everything else around it, it’s all the stuff. You’ve gotta sell a lot of coffees in order to make any money, so we had I think we had the turn over something like 1,400 pounds a day in order to break even.

EMMA: Yeah which is crazy.

SAM: Think how many two pound 50 cups of coffee that is. You gotta be like you gotta be churning them out on a conveyor belt.

EMMA: And that the customers want to pay for them.

SAM: So making a pound a cup just isn’t good enough. You gotta have other things and what we were told before we started, which we didn’t listen to, is if you want to make money from a coffee shop, you can’t do it from the coffee. If you want to have a good quality coffee, you need to have something else that makes the money such as food. That’s definitely something we should have gone a bit higher. Same with food, should have been a bit more expensive and yeah you just touched on it there, but everything’s more expensive than you think. Coffee shops a really obvious example of this where you don’t really know what you’re getting yourself into. We didn’t know you have to by law pay for pest control. We have to have a pest control contract and there’s only a few companies to offer pest control contracts and so they’ve got the market locked down, that it’s a legal requirement so we have to pay a thousand pounds a year in order for someone to come round twice a year and just have a look round. That’s ridiculous that we didn’t know which is an extra 700 coffees we had to sell in order to cover that. And there were loads of things like that, stuff like a coffee machine breaking down, staff leaving, sick pay. We printed the wrong times on our cups. Did I tell you this story?

EMMA: What times?

SAM: So we ordered something like a hundred thousand takeaway cups and on it we had open monday-friday these times, saturday sunday these times.

EMMA: You weren’t open saturday sunday.

SAM: We were when we first started but about a month in we decided not to open saturday sunday by then we had two year supply cups.

EMMA: What did you do? Throw them away?

SAM: I think what we did is we bought stickers and stuck over and spent hours sticking over this cup. Just things like that that you don’t expect, but that’s not a lesson I’ve learned cuz we had the same problems, I’ll just talk about the boxes from Pipehouse Gin. There’s always unexpected expenses, so there we go, that’s the end of this podcast. Don’t compete on price, doesn’t matter what business you’re doing, you should probably go in more expensive than you think you should. I once heard someone say you need to feel uncomfortable with how much you’re charging. If you don’t feel a bit uncomfortable, you should probably charge a bit more and I think that’s some good advice. And so on that, I’m gonna say goodbye. Emma, do you have any anything you’d like to say?

EMMA: What about my supper club?

SAM: Oh supper club, oh yeah let’s talk about your supper club. I kind of threw that in with the coffee shop. It’s the same sort of thing, isn’t it is? When you started to you charged 30 pounds a head yeah people to come around and have dinner with us, basically so you have eight people plus us two, each person pays thirty pounds and they get a three course meal out of it. One of my best friend, my best man in fact, his reaction was why would anyone pay 30 pounds to come to your house when they can go to Petri Express and pay fifteen pounds?

EMMA: Yeah.

SAM: Like, we’re not competing with Petri Express, it’s a different. We can’t compete on price for that, we can’t compete with a supply chain economies of scale restaurant who are turning over hundreds of tables a day.

EMMA: Yeah.

SAM: And charge the same. It’s a totally different thing and we gotta charge accordingly. And likewise, you charge 30 pounds a head and then about a year in you were saying, no you should probably charge about 50 pounds a head.

EMMA: 40.

SAM: 40 and you never had the confidence to do it because you’d already put in initial thought into everyone head, that this is how much it costs, was if you’ve started at fourty, you’re only selling seven or eight tickets, it would have been the same difficulty selling those tickets.

EMMA: But part of it was confidence for me I didn’t want to go in at forty because that sounded too high, because I’d done some research of other supper clubs across the country, not necessarily the local ones that I thought looked really good and 30 quid was slightly cheaper than them.

SAM: Yeah.

EMMA: And that was me being stupid.

SAM: And that’s a good throwback to what I said about going to a point where you feel a bit uncomfortable.

EMMA: Yeah and also I felt if I did raise it to forty, I felt like I needed to offer it to someone else, because a lot of my customers were returned, it was about fifty percent return so they were going to come back and have a similar meal.

SAM: And knowing from your regulars there’s definitely ones who would not have come back because of the price increase.

EMMA: Yes.

SAM: Just out of the principle of the matter.

EMMA: Yes and they would have told me so as well.

SAM: Yeah but they’re not they’re not price sensitive at all, they would have paid the larger amount to begin with. Definitely, but it’s the principle.

EMMA: It’s the principle of it. Yes exactly same.

SAM: Price indicates quality if you’re choosing between supper clubs, you don’t really have any competition but if you did, if it was saturated with supper clubs, then price indicates quality on that. You want a bigger margin than you think, bare in mind when people are doing a supper club, they’re thinking people are only gonna be there from whatever seven to eleven each day. Well what you don’t realize is you spend the whole day cooking and then you spend the previous couple of days shopping for ingredients and planning the recipe and following up with people and getting the money and marketing it and everything. So, it’s more expensive than you think and you need a bigger margin than you think in order to make it worth your time.

EMMA: Yeah.

SAM: And that’s it. Alright well thanks for minding me about that. Anything else, well we’re off to an awards ceremony now.

EMMA: So wish us luck.

SAM: If you have any feedback, email us at hello@sampriestley.com. Adios.