Avoiding the Commodity Trap: The Big Mistakes

What is the Commodity Trap?

A commodity is a product that has become interchangeable with the same product from other sources; customers perceive the product as being identical regardless of the source.  When customers view your product or service as a commodity, the only differentiating factor becomes price.  This is a bad thing because it means customers will go for the cheapest option, forcing us to compete on price.

I see people posting online about compliance services like bookkeeping, payroll, tax returns etc. being commodity services.  That’s a big mistake.  These services are not a commodity unless you think they are.  What we need to do is banish that commodity thinking.

The BIG Mistakes…

One of the big mistakes that we make in our profession is very simply: we price WAY too low. 

I see this over and over again.  I did it myself when I started my accounting firm back in 1996.  For the first three years, I priced crazy low because I didn’t know how to price.  I hated people saying, “That’s a bit expensive”.  I didn’t like rejections.  I hated people saying “No”. So I gave people a price which I thought was a number they would say “Yes” to. 

I then realised over the next few years that I had so many problems in my firm as a result, problems which I know other people in the profession have as well. 

I see it all the time: when you price too low, obviously that affects your margins, so you make less money.  But what then happens is, to try and make ends meet, we start working longer hours.  We work way too hard, for way too little money.

Attracting the wrong clients…

The other big thing that happens, and this was something that I found happening to me back in 1996, is when you price too low you attract the wrong types of clients.  You build a practice very quickly full of people who are looking for cheap accountants.  Those are the clients that very often end up complaining the most, being the slowest to pay, and being the least enjoyable to work with.

And yet, what happens when we keep our prices low is we actually put off the great clients from working with us.  We want to attract great business owners that are building successful businesses, but those clients know that there is a correlation between quality and price.

When we see something that’s cheap, we assume it’s cheap because it’s not very good.  And some clients are okay with that because they just want the cheapest.  But the best clients want the best service, and they know that they will have to pay accordingly for that.

How does commoditisation happen?

We have to avoid being too cheap.  One of the reasons that we are too cheap is because we have this commodity mindset: ‘It’s just bookkeeping services, it’s just tax returns, it’s a commodity. There’s a market rate for this and I have to be competitive.  I have to price the same or cheaper than everybody else.’  That’s a HUGE mistake!

Over the last 10-15 years as technologies have evolved, I've seen a lot of industries struggling with prices because of the commodity mindset.

Take graphic design for example.  There are now organisations and websites, such as 99designs, which allow you to go and post what you are looking for in a logo and have designers come to you letting you know if they can do it or not and how much they will charge.  That’s encouraging customers to pick the cheapest offer.

You might have also heard of Fiverr, a website where everything is $5.  This is again commoditising things because people can go online and find the cheapest.

I’ve even seen sites for our profession where people can go to look for an accountant or bookkeeper, and then others on the platform can offer their services and a price.  The business owner can then choose the cheapest.

How do we avoid becoming a commodity?

We have to avoid that; we have to stop competing on price.  We are in the relationship industry, which means clients are talking to you, they value your insight and advice.  It’s your personality and relationship with the client that they can’t get anywhere else.  You are naturally different and so you cannot be a commodity.

So how do we avoid the commodity trap?  Well, ultimately it comes down to differentiating yourself.  The more we can be different and better than everybody else, the less people can compare, and we don’t have to compete on price.

In the next blog post in this series, I’m going to show you how, with a little creativity, nothing has to be a commodity.  We can differentiate anything, and that includes 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. 

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”