When you start in business, it is very easy to develop the new entrant mentality. This is something that I discourage in my clients. In fact, this week I was speaking about it to one of them, who has become very successful this year.
“Last year,” I reminded him, “I discouraged you from using price discounts to enter your market until we could gain enough feedback from your prospects about how they viewed your new service.
“If they saw your service as a low-value proposition, then we’d need to elevate the perception by way of a stronger service proposition. Plus we’d need to enhanced this new service with value-added products or additional services. This would transform your offering from its low-value perception into a high-value proposition to a specific segment of your local market.”
Nevertheless, after receiving this feedback from the local market last year and a modest amount of growth as a result of this conservative approach, this year I encouraged my client to use pricing as a technique for entering a market niche.
We started with a massive 40% discount offer, moved next to a 30% and finally a 25% off promotion during the most competitive months of the year. Demand for his services exploded! The business owner had to hire help and has been overwhelmed with work ever since. His customer base sextupled in a matter of 3 months. People now know there is a new business in town.
However, for over 2 months this new business owner has not been able to dedicate the appropriate type of effort that may ensure the future viability of his own business!
How did that happen?
The Secret of Discounts is That They’re Investments Not Expenditures
Whether he had seen it or not, this owner’s initial successful behavior was now undermining his whole start in business. He is behaving just like an employee, impervious about the difference between a cost and an investment.
Granted, he is overwhelmed with work right now and feel highly occupied and useful. He doesn’t want to miss a single call that his business has been receiving from the marketing campaigns that we put together. But the calls are under discount. He’s not making much of a profit.
I told him that this degree of devotion to meeting discount-generated demand had been not only understandable but prudent on the whole, especially given that presently the business is at the peak of its annual cycle and should exploit all available opportunities.
However, now the business is also de facto stuck in what is called the “feast or famine” pattern, since discounts are to treated as investment meant to produce testimonial and goodwill for a new business. If seen as a means to get actual new customers, then their costly expenditures because they attract price-sensitive customers.
When this entrepreneur had his first start in business he experienced a bit of the “feast or famine” situation. In fact, it happened earlier in the year and I was there to see the panic in his eyes, when the 7 skinny cows started eating his 7 fattened cows. He had gone from a very lucrative opportunity that had arrived during the low season of the year to a dead phone.
Demand was so low that this lull could easily have ended his venture, had it not been for the strong and unique selling proposition (USP) that we had worked on much earlier, which had placed him in excellent standing with his early clientele. He kept getting business, though at a far more diminished rate. This tremendously frightened him.
Soon after, I told him that the skinny cows were coming for him again because he was doing the very thing that encourages their return. They were coming for his discounts!
What can you learn about this situation, if you want a start in business yourself that doesn’t come with the seed of its own destruction planted within it?
Start In Business With A Readiness Not To Use Price Always To Your Advantage
There is a price to pay for growth (call it an investment). You pay presently with fewer sales in order to have enough time to plan and execute a long-term strategy that can gain longevity for your business. In other words, unless you have the money to pay others to keep closing sales and delivering services on your behalf in the short-term, you will need to forgo some of those early sales to prepare your business for long-term viability. 
The pricing discount strategy that my client and I executed this year works mainly because a local market consists of various segments with customers that display different purchasing behaviors. Some customers are loyal to their merchants. Other customers purchase based on convenience. Others want novelty, and others yet are price sensitive.
The latter respond well to price discounts. They’re the kind of people who join Groupon and Living Social networks for the savings. Among them you might find a small proportion of consumers who might be willing to trade quality for lower price. This is the kind of market that you should want to go after when you start in business. They’re the kind of people who are dissatisfied with your competitors and are willing to give you a try for a lower price.
As a recent entrant with a new service offering, you could expand your market base using a price discount. This way you can help grow the overall market and stimulate more awareness about the value of services like yours.
But this pricing approach also stimulates more competition. And competition lowers prices anyway. So, after a certain point you really need not compete on price. Once you’ve made your entry into the market, stop focusing on price. Once you’re established in the market, you need a new strategy – one geared for growth not for attracting price-sensitive customers.
In fact, in markets where there is little or no real perceived difference between the value of a new service and that of an established service, the new entrant is likely to be considered a threat by competitors, and these companies will aggressively defend against you. If you keep growing based on a low-price strategy, then you’re going to get whacked by your more established competitors, who can outlast you in executing a lower price strategy of their own. Price-sensitive customers are disloyal. They only focus on price. What do you think they will do to you?
They will abandon you for your competitors!
This is called a price war. It reduces the profitability of everyone involved. It trains customers to judge your service chiefly on price. Customers who purchase based on price alone are more expensive and less profitable to serve than loyal customers. So, bottom line, competing on price (discounts, rebates, refunds) kills business profitability and soon enough defeats the point of your start in business.
Start In Business With A Focus On Value
You need to compete on value not price. You might say to me, “I don’t know how to do that”. Well, it’s critical that you ask how to do it if you don’t want to work for disloyal customers. It’s only too easy for a momentarily successful entrepreneur, who is receiving good demand from an early market response to a low-price series of promotions, to get into a narrow-minded mode, resist criticism, assert ignorance and then proceed as if closing deals is all that’s need for business success.
After all, the money is flowing right in. You’re busy delivering service. What else can you be expected to do, right?
And then you get a call from your accountant. You’re not making any profit and your bigger competitor just launched a grand special – half off! – just to run you out of the neighborhood.
However, the right attitude should be one of asking, “What can I do to avoid continuing to give discounts to keep orders coming in?” You know you can’t continue working like this and make your enterprise sustainable. The way things are right now with my client, he can’t even get a cold without endangering his entire operation. He may not fully perceive it, but he is performing his services on the edge of a knife. He cannot slip up without seriously injuring himself and his business. So, it’d be worthwhile if he continues to listen to sound advice.
At the start in business, when you find yourself in a similar situation, you need to develop a different mindset and put it into practice soon. You need to start thinking beyond delivering the one service you do. You need to start thinking about value-added services and promoting these with your clients and planning how to execute them as a top priority, hiring people to do this extra work for you once you bite more than you can chew.
You’ve got to get out of the owner-worker practice and into the manager-entrepreneur mindset and practice. Your business can offer more than the one service that got your start in business.
The Advantages of Focusing on Value
By adding additional services, you will gain more room for negotiating better pricing and packages due to value-add. It’s more than knowing this. You must put it to practice. And this will require re-prioritizing your daily tasks and giving up some business to find new products, services or business alliances with which to produce value-add for your existing and future customers.
Without making this sacrifice you can easily spend a year, after finding alternative ways better to service your customers through, and yet do nothing about it, despite evidence that creating a more comprehensive or unique offering could produce far more margin for you in that same amount of time and with the same amount of effort that you spend delivering existing, low-differentiation, discounted offers.
(And, yes, I know you can be swamped with work and low-price strategy can produce a surge in demand. But that’s precisely it.)
Under a price discount-centric method of managing your business, you’ll always be either too swamped or too famished – feast or famine – like a typical small business, and only a few weeks from potential bankruptcy, unemployment or from a deluge and drowning in work, which is a pattern that will ultimately exhaust you. Make time to stabilize your operation and flatten those peaks and valleys. This is a discipline that characterize a mature business and it takes time to master it.
As tempting as it may be to use a low-pricing technique to generate business, this is the wrong way to go once you’ve successfully made your entry into your local market. Instead, start in business by focusing on adding value to your service offerings to increase the perception that your services may be worth far more than what your competitors offer, and keep away from becoming a price discount junkie.