When the economy slows and consumers start to hold on to their cash a little tighter, many small businesses make a big mistake. When a sales person, either in retail or direct sales, is faced with sales resistance, many of them have an initial response to ask “would you buy if the price was lower?” This is a big mistake, and one you may never recover from.
Price cutting is a bad idea. Many industries have created a very difficult situation for them selves by always having sales and price cutting. Most of the people that don’t buy because they say your price is too high, are really not buying because you haven’t sufficiently demonstrated value. Cutting price almost never leads to new sales. Unless someone was already planning on buying in the first place, price cutting doesn’t work. Not only doesn’t it work, it’s also very destructive to your profits.
Product is priced at $100.
Your cost is $70 (this is a 30% margin).
Because sales are slow you put the product on sale for 20% off so you now sell the product for $80. Your profit is now $10.
So a 20% price reduction = a 66% cut in profits.
Now that’s bad enough, but here’s the really bad part, once you lower the price, you’ll find that you need to keep it priced lower to maintain future sales. So your $100 sale is now $80. Cut the price again for the next sale and guess what, your profit is zero. Believe it or not it gets worse.
The next step is that your competitors now decide to lower their prices. Can you survive a price war? Unless you are the lowest price in a price war, you’re helping your competitor sell more.
So here is the scenario you’re facing:
1. The economy slows, so customers become more price sensitive and are slower to make buying decisions
2. As you start to feel the sales crunch you decide to offer a price discount
3. Customers that were already going to buy take advantage of the price discount
4. Your profit margins begin to sink, and now you have less money to invest in marketing or in training your people or in improving your products and your overall business
5. Your competitors also lower their price and you have to continue cutting your price until your profits are at zero
6. Unless you are the lowest price you’re actually helping your competitor sell more
Not the greatest situation is it? Price cutting has always been seen as the lazy way out. Management Guru Michael Porter says “cutting prices is usually insane if the competition can go as low as you can.”
So what do you do? Here are three suggestions:
1. Better explain the value of your offering – find out exactly what your customers want and then work to deliver on that.
2. Bundle or package products and services to maintain higher prices
3. Do something special – go to your best customers and create an added value offering to solidify their loyalty
The bottom line is if your business exists strictly as a me-too, you have no choice but to compete on price. Price is only an issue in the absence of value. If you haven’t taken the time to truly understand the wants and needs of your customers and to properly demonstrate that you can deliver, then price cutting may be your only option.
It’s a lot of work to compete on value, but especially in times of economic uncertainty, it’s more important than ever. Remember it’s not the product or service and the associated features people are buying; it is the solution to their problem or the satisfaction of a need or want. Focus on that before cutting your price.