IS LOWERING YOUR PRICES A GOOD IDEA?
There are many ways to lower your prices: a promotion, a discount, a loss leader. We have articles on discounts and loss leaders so if you want more information on these topics, you can read them.
We will concentrate here on more permanent price reduction rather than using a discount or a promotion. In general, lowering prices can help for several things:
- Moving inventory when the regular price is well established;
- Stealing market share from your competitors;
- Attracting new customers.
However, once the price is reduced it is difficult to go back to the “normal” price, because the normal price is now re-determined by the discounted price. An example of this is Internet service providers offering special prices for 6 to 12 months and sometimes even longer. With a promotion of this duration, who will want to pay the full price? Customers will move from promotion to promotion to keep paying a lower price.
A risk often associated with these “new customers” promotions is the fact that you can create dissatisfaction with your existing customers who pay the full price for the product/service. It makes sense, when organizing a promotion for new customers, to also think about your regular customers. Give them something so they will not be penalized.
Another point to take into consideration is the fact that depending on the importance of your price reduction, you will attract customers who are able to pay the promotional price but not necessarily the full price. An example of this behavior is restaurants that offer discount coupons on various promotional platforms. Although these promotions bring new customers, the few restaurateurs with whom I spoke told me that the customers who came did it almost exclusively when there were promotions. Very few returned without the coupons.
A price decrease can also bring about a change in your business model. If you are a value-added company, a price decrease could transform your company into a bigger company. You must understand this and want this transformation and above all, you must have the resources in place to properly respond to this increase in demand in a way that benefits the company.
Price reduction can also lead to a price war. If you want to capture market share from your competitors, depending on the risk you pose in the marketplace and your company image, a price war can be triggered. The winner will be the customer without question, but surely not you.
When the price decrease is on foreign markets, the “anti-dumping” agreement comes into play and regulates everything. There are many ways to lower the price of sales on a given market. For more information, read the following.
Finally the safest price reductions are often those made to liquidate an obsolete inventory. Why are they safer? Because they disappear when the product/service is liquidated. Therefore the promotional price does not (or hardly) affect new products and helps to attract new customers without affecting regular customers (regular customers can also buy promotional merchandise).
So if you want to do a price decrease, pay attention to all the points above. And above all, do not forget your loyal customers.
If you have any questions or comments, please do not hesitate to contact me.