If You’re the Cheapest, That’s the Problem!

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Being the cheapest feels like a strategy, but it’s a confession. It tells the market you couldn’t find a single other reason for them to choose you. And here’s the trap.

The lowest price is an emote. It’s a trap door. Anyone can undercut you tomorrow and the customers you want on price will follow them out the door the same way they came in.

Today, why being the cheapest is the most expensive position in your market and how to climb out of it without losing the customers you actually want. Welcome to From Burnout to Bought Out, the podcast for business owners who are tired of being the hardest working, lowest paid employee in their own company. I’m John, joined as always by Ryan, and together we’ve spent years inside owner-led businesses helping founders go from running on fumes to running a business that actually runs without them.

Every episode we break down the real problems nobody talks about. The burnout, the bottlenecks, the blind spots, and show you what it looks like to build a business that’s profitable, sellable, and doesn’t need you in the building every day to survive. Whether you’re grinding through a plateau, thinking about an exit, or just trying to take a vacation without your phone blowing up, you’re in the right place.

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Let’s get into it. Ryan. John.

Good episode up ahead. It is. I think this is the good one.

The only good one. We’re 2020 in and this will be the one. You know, this one is the one that puts us on the map in Southeast Asia.

(1:40 – 3:39)

Yeah. Yes. Sorry everybody else that’s been sort of hanging on, hoping.

God, when is this going to get good? When is this guy going to get less tedious? I think we just dangle enough where like, oh man, they almost got it. They almost got it. And just a confession out there, we don’t know what we almost got.

We have no idea. No. No.

100 monkeys and a typewriter. Except two monkeys. Two monkeys.

And a microphone. And a llama. Oh, I’m a llama this week.

Yep. You’re a llama this week. Well, who knows what this one is, but you’re a llama last week.

That’s true. I will. I got to get that headshot in before I turn into something really cheap, cheap and ugly.

Besides a llama and a donkey? Yeah. Have you been to Tijuana? You know what? Donkeys are useful and llamas are ugly. Llamas spit on you.

That’s true. That’s the one thing I said to Nayla that I like llamas, but I don’t spit on people. So not that, not yet.

You are Canadian, so. Well, you know, we do make exceptions. It’s true.

Especially when the U.S. hockey team goes and plays in Canada next year. Oh, that’s not even, that’s, that’s not even, yeah, I don’t know. I’m still irked over the Olympics.

Not me. I thought they were great. Llama mode now.

Spit in your direction. All righty, let’s get going. Let’s get to it.

As per your cold open, plenty of owners are proud of being the affordable option, and you’re saying that’s a mistake. Give me the case. Give me the composite.

You always give us composite. I don’t know if it’s now, but yeah, give us the case for why the cheapest is not the best option. All right, so yeah, composite.

Every detail is real. It’s just not one company. Yada, yada, yada.

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So I’m going to use the example here. Three million dollar service business. It’s the cheapest in the region.

Phone ringing off the hook. Book solid. The owner’s exhausted.

Net margin, 4%. But the biggest, busiest team in town, right? Taking home less than his lead tech, right? That’s the race to the bottom. And it has a winner.

And the winner gets, right, to survive on the thinnest margin for the longest period, right? Can I outlive my competitors? That’s not a prize. It’s like a death sentence, right? It’s a prolonged sentence. And here’s the trap.

At 4% margin, if you have one slow month, one bad debt, one massive truck repair, the year is gone. Because there’s no cushion. Volume, hit it.

Hit the fragility that’s underneath there. Being cheapest is an emote. Anyone with a lower overhead or a bigger appetite for pain can take it from you overnight.

You are not Walmart. So call back to the last episode we did, right? Fixing the wrong thing. The owner, his problem was that he thought he needed more customers.

But this one has every customer in the county. What he actually has is a pricing problem, right? They don’t need more leads. They need more profit, better pricing.

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Yeah. You’re trying to fill that revenue gap just with more, more, more. And actually, if you worked less and had higher margins, then you’re able to generate that more easier without stressing the entire system out.

Absolutely right. And we’re going to get into more of that down the road, John, with how the math actually plays out. Gotcha.

Okay. Yeah. I mean, a customer is a customer, right? I think that’s most businesses approach things that way.

I’ll take a customer, even though the margin’s thin. But what we’re clearly saying here is that the cheap seekers actually make the business worse. But prove it.

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So if you attract a customer by price and price alone as being the cheapest, right? You recruit the people who only care about the cheapest, right? You get what you get. So price shoppers aren’t loyal, right? They’re loyal to the lowest number. If they can get something over at your competitor for $5 less, they’re gone.

And on their way out the door, they’re going to tell you about it, right? Here’s the hidden cost behind thin margin. The customers are going to haggle every invoice, right? Your team is going to burn hours and hours and hours defending the price instead of doing the work. These price shoppers, they churn fast.

(6:52 – 8:11)

Why? Because they’re bargain hunters, right? Cheap begets cheap. And the thing is that they’re going to give you the harshest reviews because they expect five-star everything. The lowest paying customers are almost always the highest maintenance.

You’re paying them for the privilege of being abused. And that’s something different in a different show, in a different podcast, right? And if you’re thinking that they’re going to turn into a great customer, they’re not. They don’t care.

They only care about the price. That’s it. They don’t care about value.

They don’t care about service. They care about price. And not every customer is the same.

Going back to the episode where your best customer is costing you money, right? That’s where we ran the margin analysis and the biggest account turned into the worst one there was. So if your analysis is telling you that it’s unprofitable or you’re not making money, you need to fire them. But if you’re going for the lowest price and town, you’re inviting those customers to come out.

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Gotcha. Besides just the low margin, there’s a ton of hidden impact. What are some of the hidden things that impact the business? You’re barely surviving.

It’s a volume game at that point. And so if you keep going and going and going, you have to keep going and going. You can’t stop because you need that.

You’ve got to keep filling in that because the margins are so low. And if there’s an unexpected surprise cost out there, you don’t have the buffer to maintain it. You don’t have a buffer to carry that.

And that’s the problem. Yeah. And your team is stretched thin.

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You can’t hire more people to get ahead of it and do better quality work as well. But a bunch of challenges with it all, right? For operationally as well as financially. Right.

You can have it cheap, you can have it fast, or you can have it in good quality. But you can’t have all three. Awesome.

Time for a fun fact. Fun fact, and it’s dead on topic for the first time. Researchers gave people the exact same wine twice, but told them one bottle cost $90 and the other one cost 10.

It’s the same one. People rated the expensive one as tasting genuinely better. Now here’s the kicker.

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Brain scans showed the pleasure centers actually lit up more for the expensive one. Their brains just didn’t say it was better. The price made them physically enjoy it more.

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So the price literally changes the experience. The price is part of the product. When you’re the cheapest, you’re not just leaving money on the table.

You’re making your own work taste worse to the customer before they even use it. Wow. Wow.

So they get a better brain experience if you charge them more. They really do. I love it.

They do. That’s why we spend more money on anything. All right.

More money. More money. Time for a word from our sponsors.

Quick Break, brought to you by Bolt Electric, serving Tacoma, Seattle, and pretty much the whole Puget Sound. And this one is the episode because electrical is the one job where I found a cheaper guy is how the house burns down. That’s not a bit.

That’s just true. The cheapest electrician is a coin flip with your drywall as the prize. Bolt does it the right way.

(10:43 – 11:42)

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That’s either a five-star review or the beginning of a horror movie. And given the 4.9 rating, I’m confident it’s a horror movie. Let’s hope not.

Bolt Electric, 253-224-3837. BoltWA.com. New clients get 100 off a panel upgrade and 10% off the first repair. Don’t hire the cheapest guy to touch the wires.

That’s the whole episode. Holding a voltmeter. Voltmeter? Voltometer? This episode, that’s your latest voltmeter episode.

All right. Okay. Let’s keep going.

(11:42 – 12:56)

You keep saying the price sends a message. Unpack it. What is my price actually telling the customer before they even meet me? Your price is the first thing the customer hears about your quality.

And it talks before you even get to say a word. A low price says, I’m not confident this is worth more. And the customer believes you.

Why wouldn’t they? You’re the expert on your own value. But you can go too far. If the price is so low, like half the quote of your nearest competitor, the customer isn’t thinking bargain.

They’re thinking, what’s wrong? There’s something got to be on here, right? When you compete on price and price alone, you’re announcing that value is not even in the argument. You’ve conceded the quality conversation before it even started. So let’s go through a couple of different pricing models that we have.

Cost plus pricing, right? This is you add up your cost, tack on a margin. It prices your inputs. It has nothing to do with the outcome that’s worth what the customer is looking for.

And that’s the cost. The cost plus trap is simply this. It prices your inefficiency.

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And the thing is, when you get faster and better at the work, the cost plus rewards you with less money. You get more efficient to get less. Value-based pricing is another one.

And it prices the outcome. What’s solving this problem work for them? That’s the question we’re asking. So a dry basement is worth the same, whether it took you an hour or a day.

And price is not the only signal, right? Your truck, the shirts, the proposal, how fast you call back. They all show up looking at that. Are they representing your company well or not? The customer who just wants the best deal still equates price with quality.

Deal means good value, not lowest number. And those things are two completely different. You’re not in the business of being chosen.

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You are in the business of being worth choosing. And you need to price accordingly. Awesome.

Okay. So clearly some customers are just asking for the best deal. And if cheap is all they want, isn’t that what you just need to give them? How do we drive them up the food chain? You know, they want to feel smart.

And that’s different than that question. But nobody’s ever bragged about finding the cheapest surgeon, right? People brag about the guy who was worth it, right? And how well it was done and what value they had, right? That’s the thing. They want to make sure that they’re the best consumer and they’re making the best choices.

And hardly ever is price the consideration at the end. Gotcha. Yeah.

Understood. Good analogy for the surgeon. I got the cheapest surgeon.

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I still got my bow leg. Yeah, but they were cheap. That’s right.

I got a matching set. I’m the best surgeon. Okay.

So clearly we need to get them moving, as I say, higher up the food chain. Here’s the fear every owner has when they start thinking about raising the prices, that they’ll lose their customers. How do they achieve this? Talk me off the ledge with actual math and approach on how we can get our prices risen and make more margin.

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The fear is real, right? But I’m going to destroy it with math. Because you can lose a shocking number of customers on a price increase and still make more money. Okay.

So let’s take our composite at 4% margin. Average job is a thousand dollars. So he keeps, she keeps $40.

Raises prices 10%. So now the new job is $1,100, right? 10% of a thousand is a hundred. Add them together, $1,100.

It’s probably like $1,500 in Canadian. His cost didn’t change, right? So we’re going to keep that straight there. So that’s an extra $100 in pure profit.

So it went from $40 to $140, that 10% increase. That profit per job is almost three times more with that 10% increase. Okay.

From 40 to 140, it’s three, three and change, right? Making more profit with the same amount of work. Now let’s run in the other direction, right? Because that’s, that’s another that really should scare you out there. Let’s discount that same thousand dollars by 10%.

Now we’re at 900 bucks. You don’t make the $60. You lose 60.

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Right. Right. Yeah.

You don’t lose it. You don’t make the 40. You lose the 60.

Sorry, I got confused there with my math. Right. Okay.

You’re only a numbers guy. Don’t worry about it. Right.

Yeah. Don’t let me do your taxes. And that’s why a discount feels so harmless, but does so much damage.

That 10% off, right? Is not a rounding area. That’s, that’s huge. Here’s the thing.

When you raise your prices and you’re giving good quality and you’re giving good service, you’re not going to lose your best customers, right? You’re going to lose the price shoppers, the ones that are going to give you the harshest reviews. That’s going to take up more, more of your team time, right? Because they’re going to expect five-star service. So this is your opportunity to shed the people that cause 80% of your headaches, right? It reminds me of a joke, John, a busy waiter walks up to a group of Jewish women eating lunch.

He approaches the table and ask ladies, is anything okay? You won’t lose your best customers, right? Low margin makes price increases more powerful, not less. The thinner your margin, the more a small price bump multiplies your profit from 40 to 140. Do it on the calculator.

See what that number would do to you if you raise your prices 10%. Let that sink in a little bit. Let’s get brave here.

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Awesome. I mean, yeah, that was, that’s a huge, the whole calculation there around raising 10% and you can lose a third of your customer base. That’s crazy.

That should be an aha moment to people to say, hey, actually, there’s no way I’m going to lose a third of my customer base or for a small increase. And it makes me that much more margin. So does that hold true? What is the break even on that price increase? Was that just an example? That’s just an example.

You’ll have to do it yourself, right? But when you have a lower margin, just a conservative bump increase multiplies the profit effect, right? And that’s something that you need to look at and say, where does it come? How many customers could I lose from this? But then the question you really need to ask yourself is, do I care if I lose them? Right. Especially if it’s the bottom feeders, right? The biggest complainers, because they’re eating up a whole lot of your time as well. So yeah, it’s a good way to call, I guess, but just to say it back, it really depends on your margin level and you have to perform a calculation for your business and understand what a percentage increase actually means in terms of the net margin you pull out and therefore how much, how many of your existing customers you could lose.

Absolutely, John. And we’re going to go over that a little bit later too, is what that effect is and all that kind of good stuff. So stay tuned.

Excellent. In which case, let me give you a marketing tip of the week or MTOW. Build the referral ask, right? Referrals are a fantastic source of additional revenue and an easy route to more clients.

Referrals are the lowest costing leads you’ll ever get. And the magic for this pricing episode, a referral customer barely asked about price. They came pre-sold based on trust.

And that’s what we’re saying. We should be pushing versus cost. They’re not comparing you to three cheaper quotes because their friend already told them you’re worth it.

The referred customer skips the whole price fight. That’s the opposite of the bargain hunter. Exactly right.

But there’s, here’s the problem. Most owners just hope for referrals and hope is not a system. So you have to, one step this week, build your ask into your process at one specific moment in time.

Right after a customer tells you they’re happy, stay in plain words. The biggest compliment you can give us is sending us someone like you. Pick that trigger moment this week, script the one sentence.

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That’s it. That’s it? That is it. All right.

Well, that amazing marketing tip or MTOW, it was brought to you by Bolt Electric. I bet you they are now regretting saying yes to sponsoring this episode. So one more from Bolt Electric.

And I want you to talk about the words code compliant, whisper it tonight, sweet nothings into your loved one’s ears, code compliant, because they don’t sound sexy until you try to sell your house for nighttime. I’m going to whisper that in bed tonight. You’re so code compliant.

(21:46 – 22:34)

You have a whole thing about this, don’t you? I have a whole thing. The bargain electricians looks fine right up until the inspector shows up and turns your closing into a hostage situation. I live in Columbia, so I know about those.

Bolt doesn’t decode for the first time, so it passes the first time. Panel upgrades, rewiring old houses, EV chargers, backup generators for when the Washington rain finally takes the grid down. Which in the Pacific Northwest is less if and more Tuesday.

As a Canadian, I’ll say the one thing we truly understand is losing power and bad weather. It’s basically our version of a national holiday. We light a candle, stare into the dark, and we reconnect with our ancestors.

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That’s your one. That is my one. Bolt Electric, 253-224-3837.

BoltWA.com, Tacoma, Seattle, and the whole sound. Do it right, do it once. Code compliant.

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That last bit wasn’t even scripted. We’re getting good at this shit, Ryan. Holy.

(22:56 – 24:26)

We have more fun than we deserve. True that. Okay, so yeah, as per last segment, I believe the math.

Now the scary part, how do we raise it without blowing up the whole business? Give me the playbook. Reposition before you price. If you just raise the number without raising the story, it’s just a more expensive version of the same thing, right? You got to change what you’re selling first.

So lead with the outcome and guarantee, not the hours. Package it, name it, make the value legible. Elite, Precision, Legendary, Ferrari, put a name to it, right? It’s the wine bottle thing.

If you raise on value, don’t apologize. Don’t sneak it in and hope nobody notices. State it plainly.

We’ve invested in X and our pricing reflects the quality you can count on. So going back to your two episodes where you confiscated the episode, we lost half our viewers and listeners, right? You actually did say something that was worthwhile in the old hour and a half of diatribe. Nobody heard it though.

Well, they’re going to listen because it’s from me, right? Okay. Yeah, if you repeat it, it’s much better. Absolutely, right? So reposition before you reprice, right? That’s the position step of pace, doing real work.

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Positioning isn’t a branding exercise you do when you’re bored. It’s a thing that holds a new number up. If you skip it and all you’ve got is a bigger price attached to the same story.

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Tell your team before you tell your market. This is a huge one. The new price dies at the counter if the person quoting it doesn’t believe it, right? Well, it’s just this price last week, what happened, right? I’ll give you the old price again.

They can’t apologize for the price increase. They have to know it, believe it, understand it. That’s the new price.

And this is your time to sell something real, right? So pick a time. Is it a new year, new season, a service you actually improved? A price change with no reason is just an announcement, right? So you need to make it a don’t make it part of something bigger and have it stay in effect, right? And those are two good examples of doing that. And then you can grandfather your customers and level them up little by little, 5% increase, 10% increase, whatever that is, or get rid of them, right? If they’re price shoppers, they’re giving you, they’re taking way too much time than they need to, then get rid of them.

That’s it. The new prices, the new customers don’t get the new prices immediately. And the reason is, is that they don’t know about your old prices.

They’re not stuck on that number. It’s a new ballgame for them. So your price is the price right now, right? And that’s a good perspective, right? And then you might get some pushback, right? That you’re more than the other guy, right? Well, yeah, we got it, but we offer this and that and that, right? And the other guy doesn’t.

We have these certifications. These other people don’t, right? And you can also slip in a comment like this where, yeah, you know what? If you want to use the other guys, go ahead, but make sure to lock up your lurker cabinet if they’re working in the house, right? Have you checked the Epstein files? The other thing is that you are going to lose. At some point, somebody is going to push you back, but that’s the whole reason.

If nobody pushes you back on that price increase, you’re still too low. Price it up again, right? So if you’re scared, raise it in steps, right? We should be charging double this. Fantastic.

Ease it up then. 10% next month, 10% again next month. You’ll get there, right? And if you haven’t raised your prices in years, knock, knock.

Hi, I’m inflation. Where have you been? All I’ve been doing is taking money out of your bank account this entire time. Raise them.

Got it. So back to our sponsors, you better get your electrical work done before Bolt raises their prices. 10% going up next month.

(27:24 – 28:14)

Yeah, that discount just disappeared. Jump on it before they hear this episode. You’ve got about a week.

That’s right. Two if you’re lucky. I really like what you said there just about how you package it, providing more value in your package and then also bumping it up with that.

I mean, that to me makes a ton of sense. And it’s super easy these days when you’ve got additional platforms and things that you can include, right? Things that can be built with your service. I think it’s just a really quick, easy ad.

And then it’s the Ferrari, right? I don’t know if anybody will call their service the Ferrari, right? But there might be some liabilities with that. But yeah, just upping your quality. So your marketing service is just about to be improved.

Ryan, I’m just letting you know. Oh, thank you. I mean, it’s pretty easy.

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If you have 4.9 star Google reviews, up your price, people are getting quality, right? Or a cheaper competitor has 3.9 stars. Which one do you want? Pay a little bit more or roll the dice with the other one? Absolutely. Yeah.

Go read the reviews. We’re increasing and improving our service. You’re getting higher quality workers.

We’ve got a higher skilled team. Therefore, that’s why we’re bumping up our pricing. And yeah, go check out the competition if you really do want to move.

Okay. So let’s, as per usual, jump in. Owners on the commute listening to our episode, the one owner.

What is the one thing they do this week? So pick one thing you sell and raise the price 10% this week. Don’t worry about the calculation. Just do it, right? Not the whole book.

One thing, one single service, one package. That’s it. But pick the something that you are genuinely good at and slightly bored by, right? If you can do it in your sleep, then you’re not charging to learn from it, right? So there’s going to be efficiencies there.

And this is what’s going to impact it. Impact it more because most of it’s going to go to profit. And apply it to new customers starting now.

You’re not renegotiating with anyone. This is the price. That’s what it is going forward.

And then I want you to do what most owners never do. Actually watch what happens for 30 days. Give it one month.

Count how many people balk. It’s always going to be fewer than the number that you think. And what usually happens is nothing.