Over the past couple of years, a “discounting trend” has been quickly making its way through the architecture industry. In order to win work, some architects are low-balling their competition by offering clients very low fees. This practice has been sparking a collective grumbling among firms that feel crucial contracts are being stolen from them… right under their noses.
But, if your architecture practice has been considering a price discount in order to attract clients, I would urge you to reconsider: Discounting will only attract low paying clients, eat into employee moral, and ultimately gut your firm until there’s nothing left.
I know these are strong words and that some of you may almost instinctively resist them. It’s certainly understandable. After all, some of your competitors may be lowering their rates, and those profit margins are getting harder to maintain. You’ve got employees to keep happy and engaged, key investments to make, and bills to pay.
The issue of low fees is reflected in how you deliver the product; you produce a fast lesser quality outcome that doesn’t represent your firm’s attitude or quality and value. Time that is allocated to the work is directly impacted by the fee, so if it’s low, you may end up with doing the minimum you can to get it done – ultimately driving down the quality of architecture and design. Also how can you return to charging a fair and reasonable fee once you start discounting?
The business world is full of examples that prove discounting your service almost always doesn’t work over the long-run.
Consider the example of Starbucks, Inc.
In 2000, Starbucks tried to penetrate the Australian cafe market. The ubiquitous global coffee chain quickly opened 84 stores, most of them in high-profile locations. Eight years later, they closed 61 of these stores. They simply could not compete with Australia’s small independent cafes and coffee shops, the majority of which continued to focus on the quality of their products and the experience they offer customers instead of engaging in a price war.
But what does coffee, a high-turnover, low profit margin, retail product got to do with the architectural industry which is, after all, a service selling design flair and intellectual capital? It’s a fair point but when it comes to the effects that discounting has on a business, products and services are interchangeable.
In my industry recruiters are notorious for undercutting. It’s a way for new entrants to quickly grab the attention of HR teams who are eager to save costs in any way they can. Invariably however, clients revert back to the service-offering that charges higher fees but offers far more in terms of value for money. How refreshing is it to interview three great candidates as opposed to wading through a dozen average candidates, none of who are right. Clients want to trust you to do a good job and leave it in your hands and come back to them at decision-making time. They don’t want to have to hold your hand and they are willing to pay fair value for that service.
New recruiters try to enter the market and compete on price all the time and they might achieve some early wins but they never last long. It’s the recruiters who know their stuff, deliver a good service and build trust that clients return to again and again.
Three Reasons to Avoid Competing on Price to Win Work
There are three main reasons why your Architecture and Interior Design firm should avoid lowering its fees in order to secure more contracts:
- You will attract low paying clients. Once you start lowering your prices, you run the very real risk that future customers will get addicted to the discount and won’t want to pay higher rates. Chasing after low-paying customers can significantly cut into your profit margins and ultimately hurt operations.
- You will lose brand equity. Brand equity is just a fancy way of saying the perceived value your prospects and customers have of your company’s services. Many studies have clearly pointed to the fact that higher priced products and services are automatically considered to be more effective, of better quality, and more valuable, than lower priced options. Plus, once you start introducing price cuts, you also can end up coming across as desperate, and desperation is never a good marketing strategy.
- You will compromise employee moral. This is a concept that doesn’t get talked about enough, yet it is extremely important. It is certainly discouraging to work with clients who don’t appreciate the value of your efforts and input, and this can quickly affect how your employees view their work as well. The result is that they will be less motivated to give each project their best.
That said, you may be wondering, “OK, Dean, so if we shouldn’t be competing on price, how do we compete and still maintain healthy profits?”
I’ll get to that in my next post… Stay tuned.