Lowering Price Doesn’t Always Translate into More Sales
One of the biggest mistakes a small business owner can make is lowering their prices during slow times. It may seem logical that lowering your price will bring more value to your customers or clients and therefore motivate more people to buy from you (as well as get current customers to buy more often) – but this can easily backfire in ways you may not have considered.
But before we move on to how inappropriate discounting can diminish your bottom line we need to dispel a myth held by too many small business owners: The believe that price drives sales.
That may seem to be an outrageous assertion. Of course price drives sales – people want to get the greatest value right? And it only follows that something that costs less is considered by consumers to be of greater value.
Value is Not the Same as Price
While it may seem that price and value mean the same thing, they don’t. Price is the cost of the exchange. I pay you this, you give me that. Price is a number and numbers are objective in nature. Five is 5 and not 6. While dictionaries may define value as “monetary worth”, in practice value is not an objective price; it is a subjective perception on the part of a consumer. For instance, a consumer may value whatever it is you’re selling so much that they are willing to pay 6 instead of 5.
Let’s give an easy to understand example. A man wants to purchase a watch. Not just any watch – he wants a watch that will communicate to others when they see it that he is financially successful. So, while a $250 watch may be a pretty close match to a $30,000 watch, because he values sending the message that he is successful, the $30,000 watch is the better value.
Our $30,000 watch man has a friend who is just as financially successful who is also in the market for a watch. However, this man values family above communicating to others he’s got money in the bank, but his original intention is to buy what many would consider to be an expensive watch. However, when he goes to make his purchase he notices a watch with his daughter’s favorite cartoon character priced at $25. Because he values family more than communicating status, he chooses to purchase the $25 watch rather than a more expensive model.
Value is different from price – and consumers have differing values. Consumers also have differing abilities as to what price points they can meet. For instance, someone may only be able to accommodate a $25 watch into their budget.
This seems to indicate that the criteria they will use when purchasing a watch will be solely placed on price. Wrong again. If our $25 watch guy values communicating out to the best extent he can that he is a man who values financial status, he’s willing to spend the entire $25 dollars he can afford on a watch that best sends that message. On the other hand, if his buddy values a watch only for its ability to indicate the current time, he’ll more likely seek out a watch that can do that for him at the lowest price he can find and spend the rest on things or services he values more.
How Discounting Can Backfire
Let’s say that you’ve got an existing base of customers whose repeat business has decreased in the last few years by 30%. Not good. You know that the quality of your product as well as customer satisfaction is historically what compelled repeat purchases. The only thing you can identify as having changed is the economy so you decide to lower your price in order to increase the volume of repeat sales. To your surprise not only doesn’t repeat business increase, some of those who have continued to purchase drop off your books. What’s up?
Well, a few things can be motivating current repeat customers to business elsewhere. For one, discounting your price can lower their trust. They thought they were getting the value they wanted at a fair price. But, when that price is discounted, they start to wonder whether they’ve been gouged during their years as a loyal repeat customer. If you now consider discounting your products or services by 15% why is it that they were paying you 15% more in years past?
Your customer might also perceive that you’ve lowered your standards which, in effect, decrease the value they once received. You might try to convince a customer until you are blue in the face that you haven’t “cut corners” in order to be able to offer a lower price, however, if the customer perceives you have, they are likely to jump ship.
This is why adding additional value rather than decreasing price can be a more effective means to increase your bottom line. If you actually can lower your price yet make a profit, it’s likely you can offer a value add (such as an additional product or service – or even a discount once a customer makes a purchase or purchases that meet a specific amount) that will have a much more profitable outcome.
The same premises apply to potential customers. Today’s prospective buyer has usually done their homework and is aware of your, and your competition’s, past price points. Offering discounts to prospective buyers can often backfire due to similar reasons we’ve cited by an existing customer base.
This doesn’t mean that lowering your price will always backfire. Offering a lower price point can work, but you’ve got to put as much effort into understanding how your customers are likely to respond to your lowering your price as you would when increasing your prices.Last modified: June 13, 2013
This story is part of our Small Business Corner, a peek into the life and trials of small business owners.