The Low, Low, Low Cost of Cutting Corners


June 11, 2013 by Brian Ghidinelli

I've been writing a lot of marketing materials over the past week and part of that is differentiating from our competitors. A challenge is explaining why our service (in many scenarios) costs more and convincing potential customers that shopping on price alone is risky. "We're better" is hardly a persuasive argument even if that is true.

To make it more difficult, we can't cram a dissertation on best practices into our first email or phone call. But these are critical factors that may eventually cause catastrophe if not checked. So here you have it, my five rules of running an underpriced Internet-based business (or, "What I wish potential customers already knew to look for"):

  1. Part-Time Participation - Our competitors are primarily nights-and-weekends operations where the proprietor has a day job in technology and created their system as a solution to a local or regional problem. Most good ideas come from such a process; you find the itch and scratch it. Good ideas with good execution in a suitably sized market will generate enough demand to justify full-time involvement and an organically grown staff will provide a reasonable level of support to the larger customer base. But what if the goal is just a supplemental income? Then minimum effort for maximum gain becomes the modus operandi. The first corner, that of sacrificing service, has been cut.

  2. Hosting from Home - At least two of our primary competitors host their applications from their residence over a DSL or Cable connection. This setup offers no protection against any number of things that will happen like power outages, severe weather, fire or something more mundane like the dog chewing on the cables. Operations like these typically have a single computer running their entire application so in case of a hardware or software failure, they are effectively out of business. Serious service providers place their servers in a colocation facility designed specifically for Internet companies that provides diesel-generator power backup, earthquake retrofitting, 100 or 500-year storm readiness, fire systems, armed physical security and Internet connectivity from many different providers such that an isolated Internet outage will not cut off the service. currently uses 4 servers in a Terremark facility in the Silicon Valley with RAID arrays, backups and multiple staff with access to fix any problems. Skipping this step saves the operation between $400 and $4000 per month plus an initial expense of thousands of dollars. It also means your critical data is one mistake away from disappearing permanently.

  3. Useless User Interface - Design, the creative skill that makes meaning and communication out of information and data is eschewed by most engineering types. This was the case at an early stage in my career as well. But what separates good (or even "acceptable") from great is a combination of interaction design (how it works) and graphic design (how it looks). Considered by many as "finishing touches", these critical skills are foundations to an easy-to-use and enjoyable application that avoids lots of squinting, searching and frustration. The "right" way includes creating user personas, paper prototyping, usability testing, heuristic analysis and other techniques to elicit the true requirements from your customers and convert them into successful software. The "budget" way is to skip it altogether. Usability schmusability! It's so obvious because it makes sense to me. It worked for Google after all. By the way, how many Googles are there?

  4. Anonymous Application Provider - This is like "Part-time Participation" but speaks more to the professionalism of the person behind the operation. Can you find a mailing address? Phone number? Name? Anything? Bueller? Serious companies want you to contact them. We love customer interaction, obtaining feedback, identifying enhancements and so forth. A company exists to solve customer problems using skills the customer doesn't have themselves. But to maintain bargain pricing, it is imperative that you minimize customer contact and your time investment. This usually results in a contact form with no guarantee on response time. Just send your request off into the abyss and pray you get a response!

  5. Pay(pal) the Piper - Unless your customer processes credit cards in their normal line of work, they will have no idea how much this costs and how hard it is to do it right. To run an underpriced service, outsourcing your payment processing to a third party like Paypal is a must. It eliminates a major programming challenge and costs less; a big win for everyone! Or is it? Because Paypal is not a bank, it is not insured nor regulated by the FDIC. This means your funds are not guaranteed. This happens rarely, but if your organization was depending on a large check in order to pay a rental deposit and found that the funds were on hold with no recourse, what would happen? What if it was a week? Two weeks? A month?

    Processing credit cards is expensive; it requires an application fee, typically a 3-year contract with monthly minimums around $40. Your discount rate is the actual percentage charged on each transaction in addition to a per-transaction fee. This usually looks like 2.5% + 0.30. The catch is even with the lowest base discount rate available of 1.9 or 2.0%, airline miles or other rewards cards are processed at a higher (and sometimes much higher) rate. This is true with corporate, international and other credit cards that many of your customers will use. Suddenly that 1.9% rate is more like 2.5% or 3% on average. Processing credit cards over the Internet also requires an Internet gateway which typically costs another $40/month. Have you ever had a charge on your card you didn't recognize and called your bank about it? Your bank will forward your inquiry along to the merchant and charge them up to $25 per incident, regardless of the outcome. Even with a 1.9% base discount rate, processing credit cards with your own merchant account costs a minimum of $1200-1500 per year. Is it any surprise that so many services outsource your funds to an uninsured and unregulated source like Paypal?

Bottom line - underpriced, understaffed and underserviced web businesses may be lucky for long periods of time but they will eventually meet one of three conclusions:

  1. Service degrades due to increased customer demand. It requires full-time attention but the pricing does not sustain full-time staff.

  2. Prices go up to sustain full-time staff. Demand grows to the point where it requires full-time attention so prices must meet profitable levels.

  3. Infrastructure is left lacking and reliability suffers or results in a catastrophic failure. If the data is unrecoverable, the site will probably shut down leaving customers without a provider or data.

Given that the only successful outcome is to raise prices, wouldn't it make sense to avoid the poor service, downtime and possible failures by starting somewhere more trustworthy?

Have a rule that I missed? You can check the contact page and call us, send us an email or write us a letter and expect a response back within a noted timeframe or leave a comment below.

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