Is a Lower Price the Best Option to Increase Sales?
by JimD, Former Moderator
- Created: December 13, 2010, 8:12 am
If your sales have not recovered from the recession, you may consider lowering the price of your products or services. Recalling Economics 101, people lowering the price will increase demand; however, you need to consider all the costs of lowering your price.
There are two trains of thought for when to lower your price: try to increase demand and due to competition, both have their own dynamics and should;t be treated the same.
Lower Price to Increase Demand
- Consider the Worth to Your Customers
Resetting your price can be a very fine line between too much and not enough. If you do not cut your price enough, there will be no change in demand and your profits will decrease. If you cut it too much, your customers may question the quick decline.
On a fundamental level, price is how your customers value your product or service. Customers are willing to pay more for something they really want or if the product is of a certain quality. By changing the price, you may affect the perceived worth of your product or service. Your customers may think the quality has decreased or the service may be cut.
- Temporary or Permanent
The first thing you will need to consider when lowering your price is if this is a short term or long term solution. If it is short term, how long will it be? The length of time is important because it will affect the psychology of your customers. For example, if you normally sell a book for $20 and you decide to make a temporary price cut to $15 and hold it there for too long, your customers may start to expect the price to be $15. When you return the price back to $20, your customers may see it as an increase in price and will expect a higher quality product.
Lower Price Due to Competition
- Who is Your Competition?
Knowing your competition is very important. You will need to know if you are competing with the same product and services. Does your product have a better quality? Do you provide better customer services? These types of questions will help you realize that it may be less expensive for them if they are purchasing lower quality products and providing no customer service. If that is the case, lowering your price will hurting you more than your competition.
Many larger businesses can negotiate lower costs due to economies of scale and they may be paying less for the same product. This is how big box stores can continually cut their prices. Another thing to consider is that some larger stores have products that are used simply to get a customer in the door. They will take a loss because the customers will buy other items. This is risky for a smaller business that might not have the same selection of products and services.
- Do You Want a Pricing War?
Getting into a pricing war can be extremely dangerous and end up hurting both businesses. If your business counters their lower price with an even lower price and that continues, you will just continue to eat away at your profit margins. Depending on how diversified you are, this may cripple your entire business.
Consider Your Profit Margins
Whichever reason you choose to lower your prices, recalculating all your profit margins is important. You should consider your profits after lowering the price and quantity increase, staying constant, and continuing to dwindle. This way you can be prepared for all scenarios and have your exit plan for each planned if they do not go according to plan.
Again, considering the small business owner who cut the price of his book by $5, he needs to look at his projected increase in demand and see if he covers the decrease in profit margin. If everything stays the same and there was no change in demand, he will simply lose the $5 per book.
Cutting your price can be a risky endeavor and you should consider how it would affect your bottom line and future price models. It can get very confusing for a customer if the product is staying the same, but the price fluctuates. If you feel you are in a bind to compete, examine all your options before you make any drastic decisions.
If you have additional questions about how to price your products and services, post them on the discussion boards.
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