Avoiding the Commodity Trap: 3 Pricing Strategies

In my last blog post, I talked about what exactly the commodity trap is, and the big mistakes our profession makes that lead to working way too hard for way too little money.  I told you that the key to avoiding commoditisation is differentiating your services so that they cannot be compared to others’.

In this blog post I’m going to show you how, with a little creativity, we can differentiate anything, including our services.  I’ll take you through 3 different pricing strategies that we can follow and explain which one is going to help you to differentiate your services so you can stop being seen as a commodity and stop pricing too low. 

We can differentiate anything…

First, let’s look at examples of how anything can be differentiated with a little creativity. Take one of the most common substances on the planet: water.  We might think of water as being a commodity because we can simply turn on a tap and it comes out for free.

However, a few decades ago some smart people thought, ‘What if we take water and put it in a nice fancy bottle.  Then we can charge $1 for a bottle.’  And people gladly pay for bottles of water, even though we can just turn on a tap and get it for free.

If we then think about what’s arguably the ultimate commodity: stocks and shares.  If you take a share in Coca-Cola, then it doesn’t matter where you go in the world to buy that share, because it is the same price everywhere at any point in time.

Yet there are people that have been creative and thought about how shares can be differentiated. Companies like Share.com have an interesting business model; they sell shares in aspirational companies like Harley Davidson, Coca-Cola, Disney, and they sell them as gifts.  They package the share in a nice frame with a certificate.  When you buy a share from them, you pay many times the price of what that share would be on the stock exchange, because they know that some people want to give it as a gift.  Perhaps they want to gift their grandchild a share in Disney, and it’s in a nice frame to put on the wall.  They thought differently about how you can take the ultimate commodity and differentiate it.

We can differentiate anything, and that includes our services.

The Me-Too Strategy

So how do we differentiate our services?  It all comes down to our pricing strategy.  We need to have a price strategy, but many people don’t.  When I ask what their price strategy is, a lot of people say, “I don’t know, I just have a timesheet and add up the hours.”  That’s not a strategy.

When we think about price and strategy, there are really only three strategies that we can follow.

The first is what I call the Me-Too strategy, and that’s the strategy that most of us use.  The Me-Too strategy means that we do the same as everybody else.

It’s what I did back in 1996 in my own accounting firm.  I would go and see a potential client, and I would talk about all the great things I could do to help them.  Then, at some point in the conversation, they would inevitably ask me the price.

During that meeting I would ask for a copy of their last set of financial statements, and I’d say it was so I could give them some tax planning ideas, which I would.  But the real reason was so I could go to the back page, because in the UK the back page is the profit and loss account, and there would be one line that I would look for.  That line says audit and accountancy fees.  I would look at what the previous accountant was charging, and I would give a similar price.  In fact, I would usually give a price that was even less, because I wanted the work.

Yes, I got the work. I built up my practice fast.  But I was losing money.

The Me-Too strategy means looking at what the rest of the profession are doing and copying them.  That’s a bad strategy because we know that most accountants and bookkeepers have no idea how to price.  They’re way too cheap, and the worst people for us to copy is our competition.

The Low-Cost Leadership Strategy

What other strategies have we got?  The second strategy is called low-cost leadership.  That simply means a strategy of purposefully being the cheapest, and that is possible to do and be very successful.

Take a look at the airline industry in Europe: EasyJet and Ryanair have done this successfully for decades. Again, in the supermarket industry, Lidl and Aldi have been very successful at building profitable businesses with low-cost leadership.

However, to do it successfully, there are certain things you have to have in place, and one of those things is that in any industry or marketplace, there’s only room for two or three companies to be successful at low-cost leadership.

The problem that you have is that you can’t do it.  You can’t be the cheapest accountant or bookkeeper and build a successful business because one of the things you have to have in place is economies of scale.  The only people that can play that game are the technology companies offering cheap bookkeeping services because they see their scale at massive levels.

We can’t compete with that, so let’s not try to compete.

The High Differentiation, High Value Strategy

The final option is what I call high differentiation, high value.

If you want to build a more profitable business, then you want to make sure you focus on how you can differentiate your business from everybody else.  How do you add more value? When you deliver huge amounts of value then you can price accordingly and charge premium prices.

What I find over and over again is that in any industry, other than a handful of firms that are successful at low-cost leadership, the most profitable firms follow high differentiation, high value.  Take for example Starbucks in the coffee industry, or Apple in the mobile phone and computer industry.  It’s the expensive companies that make more money.

That’s exactly the same in our profession.  We see the people that have really successful, profitable accounting and bookkeeping firms are doing it by focusing on being different and being better, and so charging higher prices and purposefully being the most expensive.

So, our key is, let’s stop competing on price and trying to be the cheapest.  Let’s break this commodity trap thinking by asking ourselves, ‘How can we create more value?  How can we make what we do more valuable than anybody else?’

In the third and final blog post in this series on avoiding the commodity trap, I’m going to take you through the three ways you can add more value to your services so that you can succeed at the high differentiation, high value pricing strategy.

If you’ve enjoyed this blog post, check out the full live session it’s based off on my YouTube channel: https://youtu.be/oMe1xawwDsE

If you found this valuable and would like to learn more about value pricing, I run a free live online training session every month with a topic chosen by you. Attend live and you can ask me any questions you have. Click here to register and I will send you an invitation to the next session.

Wishing you every success on your pricing journey

Mark Wickersham

Chartered Accountant, Public Speaker and Author of Amazon No.1 Best Seller “Effective Pricing for Accountants”