Is Cutting Prices REALLY the Best Solution?

Are you tempted to cut prices? You're not alone. Many businesses with slumping sales are quick to offer discounts. While cutting prices is by far the easiest marketing technique you can use, it's not the only, or even the best, solution available. As a general rule, price is not a true objection. It is the perceived value of the offer that most people question. The answer to that is not to discount the price. It is to raise the perception of the value of what is being offered. There are however 2 exceptions to this. The first is the prospect that is simply closed-minded. The person who either will not, or cannot understand. There is very little, if anything, that can be done in this case. It's usually a waste of your time. The second is the person that claims that they cannot afford what you are offering. This is usually one of two cases: The person that is actually broke, or the person that wants an exceptional deal. In the first case, there is nothing you can do unless you are willing to work for free. In the second case, you will make less money and many of these people will end up being your highest maintenance customers that always demand more for less. The question to ask yourself in this case is: “Do I really want this person for a customer and is it really worth it in the long run?” Outside of these two situations, price cuts raise some tough questions:

        - Will deep discounts cheapen your brand and image?

        - Once you cut prices, how will you raise them again without losing your current       customers?

        - Can you afford narrower margins?

        - Where do you want to be as a brand when things turn around?

When most people offer discounts they simply lower their price without modifying what they are offering. Many even slash prices across the board, without regards to profit margins on some items. This can be a recipe for financial disaster, particularly when sales are down without a corresponding drop in overhead costs. Here are 3 possible solutions from 3 savvy business owners that made big pricing changes and the results of those decisions.

Woo Your Customers Back to Your Business

Summer of 2008: an online retailer noticed that sales of high-end luxury items were slipping and he worried that this might foreshadow a dismal holiday season. The company relied on sales of high-end jewelry during their crucial end-of-year months. This jewelry was priced up to $5000 and typically accounted for about 40 percent of annual sales. Although Web traffic was up, many customers were favoring jewelry priced well under $1000. Instead of promoting his higher-priced items, The business owner decided to boost sales by appealing to his customers' current financial concerns. He created a "luxury for less" campaign and priced his lower end jewelry, which usually sold for $500 to $700, at $300 each. He then aggressively promoted the sale. He also changed his website so that it showcased the lower-cost items on the home page. Orders began to pick up. December sales volume increased 16 percent compared with the year before, with the less-expensive jewelry accounting for about 40 percent of revenue. Revenue for the year was down 17 percent compared with 2007, but the business owner was convinced that it could have been much worse. He projected that low-cost items would continue to make up a significant portion of 2009 sales, even if it means less revenue.

The moral of the story: For consumers that are bargain hunting and shunning luxury goods, cutting prices on lower-end items is a smart way to keep them spending.

Use Discounts Sparingly

In recent years, many businesses were slashing their prices but the owner of a logo-imprinted corporate gifts company was hesitant to join them. Since his company was known to be a leader in service, he feared that once his customers got hooked on cheap prices, they wouldn't pay full price again. His company's sales peaked in the previous year but, revenue had been declining and fall sales were particularly low. November sales were down 25 percent compared with the previous year. While debating a price cut, he worried about damaging his brand, but if sales didn't pick up he might have to cut staff. He eventually decided to make price cuts, but in small doses. To attract new customers, which typically account for half of the company's revenue, he decided to offer a $50 discount temporarily to first-time buyers. He also decided to mark down approximately 25% of the items he sold. This move would cut the company's margin 25 percent, but he offered discounts only on products that earned the company rebates from manufacturers for meeting certain sales goals, thereby minimizing the impact that these discounts would have on his bottom line. To sweeten the deal, he also offered free shipping. Sales in December were still down about 15 percent compared with the previous year, but it was a big improvement over November's numbers. Believing that the company maintained their position as a high-service competitor, the business owner is certain that they didn't damage their reputation. Revenues did fall 8 percent for the year, but would have been much worse. The business owner decided to continue his new priceing formula for the forseeable future.

The moral of the story: Competing on service instead of price can be challenging, but entering a price war with competitors is risky. Limited discounts can boost sales without branding the company as a discount seller.

Add Value, Not Cost

As the economy slowed, a company that offers virtual phone systems that had few competitors feared it couldn't gain market share without a price change. The problem was that their prices were already low. The owner surveyed customers and found that what users wanted were more predictable prices, a simpler set of plans, and more features for their money. It turned out that the average customer was frequently exceeding the monthly allotment of minutes for their plan. That meant more revenue for the company but annoying fees for customers. Customers also balked at paying for extra features. The business owner began reexamining the company's offerings. The question that the business owner asked himself was “How generous can we be without losing money?” In answer to that, the company increased the number of minutes offered. Features that customers used to pay extra for are now included in most plans. The new pricing structure cut margins about 10 percent but allowed the company to offer an average savings of about 40 percent to its customers. In November, a surge in sign-ups was noted. Sign-ups increased 40 percent compared with the previous year, many of them from newly out-of-work professionals starting their own businesses. Despite shrinking margins, the company is still profitable. Even during a down economy, the company was doing well.

The moral of the story: Bundling more services for the same price can be an effective way to be more competitive without cutting deeply into profits. 

I hope you find these suggestions helpful. Feel free to contact me with any questions or comments you may have. Call Wayne at 985-796-1288.  YourLMP.com