I hope you found last week’s conversation about pricing to be useful. The lesson: clients believe what we believe about our pricing. If we believe our price is too high, so will our clients. If we believe our price is a bargain for the value we create, we will transfer that belief to our clients.
On to this week. What pricing strategy are we following? We have a pricing strategy, right? What does it say about our competitive advantage? And is it sustainable?
And if you’re new here, welcome aboard. This is what we do!
One thing I found last week: Why So Many Smart People Aren’t Happy. Research shows that “[b]eing better educated, richer, or more accomplished doesn’t do much to predict whether someone will be happy. In fact, it might mean someone is less likely to be satisfied with life.”
My take: This article may help you decide what your benchmark for happy is … and if there is a happier place than just plain happy.
Two forms of competitive advantage
As far as US businesses are concerned, Michael Porter is considered the inventor of competitive strategy. In fact, I continue to use his Competitive Strategy book and classic “5 Forces” industry analysis in my valuation reports.
Porter talks at length about competitive advantage, which he says comes in two forms:
- The firm can have consistently lower costs than its rivals. This strategy should lead to higher margins as long as product quality remains at an acceptable level.
- The firm can differentiate its product from its competitors. This strategy should allow the firm to command a superior price by delivering something that clients value.
What I see in our industry
Many in our industry compete on price. This is tough because the primary input in our work is educated labor … and that cost is not decreasing. So we cannot maintain margins unless we lower our standard of acceptable product quality … or become accepting of lower margins.
A fortunate few in our industry compete by being different, which is usually related to client familiarity. They only work in this practice area or that industry niche, so they really know what those clients want/need. So they can charge a superior price.
Between a rock and a hard place
Competing on price is a transactional strategy. Competing with intimacy is a service strategy. It’s gotta be one or the other. We simply can’t compete in the middle of these two extremes because there is no sustainable competitive advantage.
Why? Because if we try to price our services somewhere in the middle, transactional clients will always believe our price is too high. At the same time, that middling price won’t provide enough profit to continue delivering the high level of intimacy that service clients demand.
Competing in the middle will cause us to fail both types of clients.
For either pricing strategy, we have to go all in. There is no middle.
If we’re transactional-oriented, we must do whatever we can to improve efficiencies and lower costs with technology and outsourcing.
If we’re service-oriented, we must constantly deliver the value that goes hand-in-glove with that status.
Being service-oriented seems a lot less draining … and a much better reputation to have.
Reading that can help
Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter.
The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market by Michael Treacy & Fred Wiersema [affiliate link].
What Are You Competing On? by Seth Godin (a must read)
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