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PricemgI teach a lot of entrepreneurial classes and one question that is always asked during the session is "Should I reduce my price?"

Of course you can do anything you want, but is it really worth it to lower your prices? There was an article in USA Today in August of 2009 talking about the consequences of lowering prices to bring in business. In the short term it will certainly bring in customers if they want to buy. Long term, you will have to ask yourself, are these the "right" customers?

If your customers are better customers what message are you giving them by lowering your prices? You’re saying our brand has changed; we’re not the store you thought we were, in fact, we’re not sure who we are!

Ray Noorda had a wonderful business in the company he founded: network software supplier Novell Inc., until he became obsessed with beating Microsoft Corporation. His battle was futile. He left Novell as it began a long downward slide.

According to Benson P. Shapiro, in his article Commodity Busting: Be a Price Maker, Not a Price Taker, in Strategy+Business Magazine, he states that smart competitors don’t try to beat their adversaries; they avoid direct competitors and instead maximize profits. The astute manager wants to establish a set of quasi "local monopolies," protected from competitive as well as customer pressure. This demands confidence, not bravado, astute analysis instead of raw aggression, and careful, empathetic focus on the other players in the marketplace.

Before you lower your prices you need to ask yourself, what for? I had an interesting conversation with a very large higher-end retailer who was experiencing a serious economic slowdown. I asked what he thought he might do and his remark was "If retail continues to be this way for the next year, I might have to close one of my underperforming stores." I asked how long had this been a problem, to which he remarked, for years, but when business was great we could carry the store. You probably know my suggestion: close it now! He thought that this was very negative thinking on my part: Why didn’t I think it would turn around? I stated if it couldn’t turn around in good times why would it turn around in bad times? Save the spending and put the money in your pocket. What did he do? He continued to drop prices, which gave salespeople an excuse for lower prices even more: "It’s not our problem they said." It also ate away at their self-confidence. What happened in one year? He closed the store.

Customers have distinct thoughts on stores that continue to change their prices, here are the results:

  • 70% said that slashing prices means the brand was overpriced to begin with. If you can’t sell it at the original price then maybe that price was wrong or did the quality change? The more you shop TJ Maxx or Marshalls the more you begin to wonder if certain brands should ever be sold at full retail prices.
  • 62% said that if a company does not slash, reduce or put a product on sale, that means that the brand is either extremely popular or already a good value. Brighton is one of those companies that has rarely if ever put merchandise on sale. Brighton just knows the stuff is unique and of good value.
  • 60% said that if a company put one item in the store on sale, then they felt other items in the store would soon go on sale. Macy’s has a habit of doing this with their women’s clothing line; by the end of the season, it’s all on sale. If you’re not too fashion conscious, it’s smart to wait until the sales and buy for the next season.

If you engage in price wars to increase your market share by cutting prices, you run the risk of lowering profits and not being able to cover your overhead. The result: you’re out of business.

Other companies, which still have the goal of maximizing their profits, follow suit by also lowering their prices, then a chain reaction occurs. The result? Everyone suffers a loss in profit. As previous research has shown, price wars seem to occur because of the mistaken belief that lowering prices below competitors’ prices is a competitive strategy. How can it be a competitive strategy if you’re not making enough money to break even — forget making a profit. What other strategies can you use to react to a competitor’s lower prices?

  • Rather than base your strategy on maximizing profit, a company can react by not changing its price at all. Instead, you can drastically increase your service level, or look for unique and more expensive merchandise and refuse to engage in the price competition. Each of these strategies can end the price wars and reduction of overall profit loss. Remember one of the signs of a business in trouble is their lowering prices.
  • Don’t lower the prices in your better lines, instead look for a cheaper price point in the same line. This will not take away from your premier brand and allow your customers to stay true to the brand.
  • You may have also noticed that Heinz ketchup and Hellman’s Mayonnaise have combated price increases by giving the customer less product.
  • According to Unilever, "Recently, inflationary pressures have brought about by the increased costs of raw materials. Rather than raise our prices, we chose to slightly reduce the size of the 32 oz quart and 16 oz pint. This is the first time in over three years that we have had to increase costs to our consumers."
  • If customer likes the product and the price remains the same, it’s easy to stay loyal. I don’t think I have ever finished a jar of ketchup or mayonnaise. Is it sneaky? Maybe. I’m still buying Hellman’s because I like the taste. Cutting the ounces wasn’t a secret.
    Remember if you’re not a price cutter, you are treading in unknown waters with unknown competitors who are better players. Players who are always cutting prices and known for “offering deals.” Those that make money at this game are masters at buying the right price points.” Tough competition.

Someone once said, I might go out of business if I don’t cut prices. The response: if you’re going out of business wouldn’t it be better to do it with money? 

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