As the economy continues to struggle, many small business owners are finding that they have to compete more and more for consumers’ attention and wallets. It’s no secret that price can be a huge motivator in people’s minds today as they go about making their purchase decisions. In an attempt to keep their sales levels up, many business owners have slashed prices. But are these deep discounts helping or hurting their businesses?
Should You Lower Prices?
Let’s say that your big box competitor down the street decides to offer their products at fire sales prices. Should you do the same? Before you run to lower your prices in order to match your competitor’s offer, you shoudl first consider if it’s really going to help.
1. Take Stock of Your Business
The key is to understand your place in the market before you decide to change you current pricing. You should ask yourself the following questions:
- Will a Price Cut Really be Effective in Bringing in More Revenue? Most businesses can categorize their clientele into segments, and each of those segments has different needs. For example, if you own a curtain company, you may have clients who want inexpensive, functional curtains or blinds, as well as those who are willing to pay for more expensive, specialty items. If you have big competitors that can afford to slash their prices, you may be tempted to do the same. But the truth is that you will only be able to lower prices in the category of less expensive products in order to attract price-conscious consumers.
- How Are Your Profit Margins? It doesn’t do any good to sell your products at a loss, no matter what your competitors are doing. Have an in-depth understanding of your cash flow and profit margins, and if a competing business lowers prices below that, then you just have to be real with the fact that you won’t be able to compete on price. In the case of the curtain store mentioned above, your efforts could be focused on either cutting costs, or even better, finding ways to add value to your products. Which brings me to the next point…
- Where are the places where you can add value? Not all consumers care about price alone; many will buy according to the great customer service and value they get with their purchase. With this in mind, before you lower prices check to see how you can add value while keeping the price the same. With the curtain store, for example, you could hire customer service representatives who can help consumers match colors and plan the decor of a particular space. You could also offer to measure the windows for free, guarantee a quick delivery, or install inexpensive child-proof cord-holders. Just keep in mind, however, that you should do some research before making any offers to be sure that your customers will indeed see it as a value-added feature or service.
2. Consider the Competition
It’s also important to understand why your competitor has lowered prices in order to determine your reaction. The three most common reasons are:
- To Take Over the Market. Many times, fledgling companies think that if they can quickly gain a large percentage of the market share, they’ll set themselves up for future growth. However, many business owners fail to plan for what will happen when they are the biggest company around, but aren’t earning an acceptable profit. A price increase at that point won’t likely go over well with consumers, and they may end up shutting their doors. Those companies that stood firm during the price wars and continued to offer great service and a valuable product reap the benefits.
- To Create Better Purchasing Power. Manufacturers offer better prices to companies that buy more, and a business owner may decide to lower prices in an attempt to have the ability to order more product and get those prices. This can be a dangerous game, because once an owner achieves better wholesale discounts, he or she will have to maintain the volume in order to keep the discount. And to do that, sales may need to continue at an unacceptable profit margin.
- To Grow a Market. Sometimes business owners in a new market will offer low prices in order to make that market grow more quickly. For instance, some businesses offer discounts to new customers, or on new products to introduce them to their customers. This is typically short-lived, and once consumers have been made aware of the new product, prices are adjusted upwards.
It’s important to know what your business’s price points are, how your business is perceived by the public, and what your competitor’s motives are before you decide what your response to price discounts will be. Once you take all of these factors into account, you’ll be in a better position to make your pricing decisions. Remember, your goal is to ultimately increase revenue, and if you make a poor choice, you could damage your cash flow in the long run.
Author Bio: Suzanne Kearns is a small business contributor for Money Crashers Personal Finance where she writes about business finances, marketing, entrepreneurship, and more.