Recently, I got into to a fun debate with a friend who wrote a blog post about staffing firms and how they need to stick to their guns and focus on high value, high margin business. The premise behind the post was that it’s better to work with a smaller, more profitable client base that values (and will pay a premium for) your expertise.
It makes sense, right? Who wouldn’t want to get rid of those low margin, price buyers? And higher margins give you the ability to spend more time building relationships, and solving problems, right?
But is lowering your price always bad?
No, it’s not. Sometimes lowering your price makes a hell of a lot of sense. But, and this is a BIG but, don’t use price as a negotiation tactic. Instead, use price as a positioning tool and part of a bigger marketing strategy.
How to use price strategically
Traditionally, price signals quality. High price = high quality. Low price = junk. But price can be used a lot more strategically — and lower prices don’t have to mean low quality, commodity business, or weak client relationships.
Let’s say all you do is recruit for one specific job discipline. Over time, you’d get pretty good at finding people for that role. In fact, you might get better than anyone in the world at recruiting for that discipline. And the better you get, the less recruiting will cost you per candidate placed. Because of your recruiting efficiency, you could charge less without negatively impacting your margins.
When you have greater recruiting (or sales) efficiency, a lower price can allow you to win more market share — AND make more profit.
Price can also be used to signal that you do things differently. As an example, look at online staffing. Firms like Elance and oDesk are growing at the fastest rate in the industry, and their fees are significantly less than traditional staffing firms (about a 10 percent markup!). But for these firms, low price is part of their business model. Online staffing firms have completely different (and lower cost) methods for recruiting, sales and service, which allows them to have a radically different pricing model — and still be profitable.
When you create a new business model that lowers cost, a lower price can give you a huge competitive advantage.
Finally, let’s assume you’re stuck in the commodity end of the staffing industry. Your clients are already price buyers. While you could abandon your clients and look for new opportunities to sell value, that might not be your best move because you might not be able to find enough clients willing to pay higher markups.
Instead, you could look to move up the value chain. Find higher value, higher margin services to sell on top of staffing. For example, you might become an MSP, offer onsite management, consult on workforce strategy, offer RPO, or provide other, more strategic services to help your clients hire and manage talent. By offering new services, you create new revenue sources, and you may be able to take control over a larger percentage of the client’s staffing spend. Between the consulting services and staffing volume, you can make more gross margin per client, even at a lower markup.
When you play a more strategic role, you can afford to charge less for commodity services and make your profit on the high value services, greater volume, and economies of scale.
To win on price, you have to be an innovator
My friend was right in his article. Simply completing on price is a losing game. But when you can be an innovator in developing process efficiencies, new business models, and/or delivering greater value, you can use price as a strategic weapon to eliminate competition, increase volume, deepen client relationships, and make a lot more money.
Innovation changes the game. And price should be one of your strategic weapons.