Saturday, December 08, 2007

Is Your Business on Welfare?

Recently a writing colleague posted an article on the Elance water cooler. The article written by Ron Lindeboom, highlighted the three different buyer types. The article is several years old, but the principles still hold true.

Lindeboom discusses the three marketing types and groups them into top tier, middle market and low end. The top tier clients representing about 15% of your client base are those that value quality and relationship. The middle tier represents about 70% of the market and they want good but fair pricing. The low end wants high end service for cut rate prices. Lindeboom calls the low end segment “Grinders.”

As a business owner, why would you ever want Grinders? Yet, far too many businesses, particularly small businesses fight for this client type. Understanding the psychology of the client segments is important but it’s equally important to understand what type of business you are.

Many small business owners are standing in the welfare line and not sure how they got there. They work hard. In fact they may be working longer hours than CEOs of Fortune 500 companies. They deliver high quality work. Yet, they are barely making ends meet. These businesses are well intentioned but are not appropriately targeting their market or pricing their services.

Other small businesses are locked into a mentality that says they can only compete on price. To win against the “more established,” or “the “larger competitors” they have to compete on price. Does this sound like you?

Still others believe that volume makes up for low pricing. These business owners proclaim “yes our pricing is low but our volume supports it.” These same business owners would like to convince you to work at a fraction of your normal fees because they’re going to give you a large amount of work.

Although I’m humiliated to admit it for a long time I too had a business that was on welfare. My company was turning out high quality work and a sucker for every sob story that justified someone negotiating our rates lower. We wanted to help and by golly help we did to the detriment of our own profit margin. In fact our margins were negative!

I’m here to tell you “Don’t try this at home! You’ll go broke!” I am a big believer in volunteering, giving back and charitable giving. However, when running a business you must realize you exist to make a profit. You can set a fixed amount of time aside to donate business services (and I advocate doing so) but your day to day operations should be generating income.

Let’s look at this from another angle. In corporate America, did your employer negotiate your salary daily? When you showed up for work, did HR say, “Gee you know right now our budget is stretched, so can you work 3 extra hours for half your salary?” Of course not! Yes, companies get into budget trouble and they often solve it by doing lay-offs or salary freezes but no company negotiates your pay (or value) on a daily basis. So why are you doing this in your own business?

Negotiation is a natural part of doing business. Negotiation however is an exchange and not the seller simply giving everything away. It is an exchange to work toward a mutual win where the critical needs of BOTH parties are satisfied. Great negotiations end with all parties feeling like a winner and it sets the stage for a good long term relationship.

However, you are not obligated to negotiate price with every potential client. When you walk into the grocery store to buy a gallon of milk, there is a price you will be required to pay. Do you get to the register and ask to pay a different price? Do you ask them to give you more milk for the same price?

Yes, I realize milk is a commodity and service businesses operate a little differently, but do you negotiate price with your doctor, dentist or hair dresser at every visit? We ask for lower pricing when we beleive the price does not reflect the value but more often than not we simply pay what is asked or we don't buy.

So, how do you begin turning things around? The first step is to examine what you have to offer. What does it cost you to provide the service? What is the value of that service to your ideal client (ideal being key here as you are not targeting grinders)? Set a fair price and stick to it. Your ideal client will pay you for the value. Grinders will not buy from you.

You may end up with fewer clients, but that’s a great thing. You want fewer clients that pay you what you’re worth. Unless of course you really do want to spend your time killing yourself for the pennies that grinders are willing to pay.

I’ve learned the hard way that clients will only value what I have to offer if I first realize that value myself. This means getting off welfare and saying No to the people who really can’t afford my services. Am I missing out on a large segment of the market? Yes, I am but it’s a segment that does not represent my ideal client anyway.


Creative said...

Thank you for the kind words about the article, "Clients or Grinders: The Choice Is Yours." A friend told me that this was here and I appreciate your comments and your own original thoughts and words regarding negotiation and working with customers. You make some great points about businesses living as if they are on welfare. People get locked into that mindset and it's a tough one to break.

Best regards,

Ron Lindeboom

Words For Hire said...

Ron, thanks for stopping by and THANK YOU for your wisdom and insight. I gained a great deal from you and was happy to pass along that knowledge to others.

Warm regards,

sexy said...