The current economic downturn has encouraged many businesses to cut their prices or fees, in order to be more competitive. These price cuts create a number of important, often overlooked issues.
Here are a few common price cut issues you need to avoid, along with some suggestions and answers.
Even small price reductions have big consequences
When a company cuts its prices, it needs to make a significant increase in sales – just to maintain the same profit level it had before the cuts.
For example: A business I studied, which was making around 45% net profit, decided to lower its prices by just 10%, as a way to halt it’s drop in sales. It then found that it needed to increase sales by 20%, simply to stay as profitable as it was before the 10% price cut! When you consider that many smaller businesses are cutting their prices by two or three times that much, it gives them a huge mountain to climb!
So, if a company is planning a price cut, it needs a powerful marketing strategy in place; to generate the additional sales required, to cover the drop in profitability.
The great price drop paradox
Consumers have been taught that when prices drop, so does quality. Because of this, when a company cuts its prices, its customers actually pay far closer attention to the quality of the products and services they receive. The paradox here, is that by lowering its prices, a company often attracts far more scrutiny from consumers and more complaints; than when they offered the same services at a higher price!
So, if a company is planning a price cut, it needs to pay more attention than ever to customer service and quality control.
Sudden price drops in a recession are often seen as a panic measure
Your customers and prospective customers are all very aware that the economy is struggling right now. They are also aware that many companies have gone broke recently – many of whom will have cut prices before hand, in an effort to increase sales and turnover. A company must, therefore, ensure its price cuts are not seen as a panic measure.
So, if a company is planning a price cut, it needs to market the cuts correctly; so as to reassure existing clients and the marketplace.
It’s easy to cut prices but hard to increase them again
Once a business cuts its prices, customers get used to the new, low prices very quickly. In fact, these low prices stop ‘feeling’ as if they are low and very soon start feeling like the typical, regular price. This can cause a major problem; when the provider needs to increase prices to their normal level again. Although they are simply charging customers what they used to, their customers will feel the ‘pain’ of a price spike.
So, if a company is planning a price cut, it needs to have a powerful strategy in place, which includes plans for increasing prices again.
My advice
If you want your products or services to be twice as valuable to your customers and prospective customers – Don’t cut your prices in half!
Instead, find a way to double (or more than double) the value of whatever you provide!
Great post, Jim. It nicely complements a post I recently made on the same subject matter.
@Jim
We did a promotional offer a couple of years ago and when it finished, people moaned about prices returning to normal. We lost several regular customers.
@Robert
Just clicked your link and could not find the post you mention. The layouts a pig to navigate around.
Make 50% of your work worth twice as much…
Nice post, Jim. Your perspective is always spot on.
Keep Cooking!
Andrew
George, here’s the link to the post I was referring to: http://marketingwizdom.com/archives/1366 titled”The forgotten cost of discounting.” It is one of 20 or so visible on the home page …
Oh how I wish people in the our industry would read this and take it to heart. Lots of price cutting going on in our industry that we must compete against. Really great and very compelling post Jim. Thanks!
Andrew,
Thanks for the comment. In my experience, increasing the value of whatever you provide is a business essential.
Amy,
People are attracted to low prices only when they believe it represents value. Equally, a higher price only seems expensive, if it represents lower value.
You find this useful: http://jimsmarketingblog.com/2009/07/18/how-to-sell-against-cheaper-competitors/
Jim,
This is so true. It takes a little while for people to wrap their heads round this sort of stuff as it goes against the “norm”. we’ve spent quite a bit of time with a few clients recently reviewing and increasing their prices. Once they’ve signed on and taken the leap of faith, the results are amazing and the drop off in business volumes always seem to be so much lower than expected. And of course, if volumes do drop, isn’t it great to be making the same amount of money from doing less work!!
Stuart,
You make a very good point! In my experience, it’s only a certain profile of client you lose, with a small price/fee increase.
They tend to be the ones who change providers all the time – because their focus is exclusively on cost and not value.
You were never going to retain their business anyway – no one retains their business. They switch and switch until they eventually go broke.
After all, relying exclusively on the cheapest providers for everything is not a great long-term business development strategy!
I was just having this conversation last night with a high-end restaurant owner looking at dropping their entree prices.
Bad move and we ultimately decided not to do it for 2 reasons:
1. People view price as quality when it comes to food.
2. They would NEVER be able to return to higher priced entrees.
I think this post is ESPECIALLY true in the hospitality industry.
Jim,
you hit the nail on the head, I come across alot of companies who think that price cuts = increase in sales and though the fundementals of it are generally true there is so much more to it.
Great Post jim look forward to reading more of your posts.
[...] I have said many times before, lowering a price is easy, but increasing that price again can be a far bigger challenge. This is why it’s essential [...]