The problem with price reductions

Whether you are a small business or even a large business you might feel some kind of pressure to lower your prices. This usually happens when a low priced competitor shows up in your area, or when the economy is going downhill and people are not spending as much. So in most cases businesses lower their prices, but that doesn’t always mean that people are going to continue buying your product.

One thing that you need to be aware of is that there are some cases where price reductions actually make sense, but for the most part these should be avoided at all costs. An example of when you should have price reductions is when your cost of doing business has dropped and you want to pass on the savings to your customers. But you do not want to reduce your prices are set to cover expenses and necessary profits and the cost of doing business has not gone down. The problem with price reduction in most cases is that it can affect the bottom line, meaning that in most cases if you are lowering your prices you are going to end up losing money that you would normally see as profits.

So rather than facing the problem of losing profits many business have discovered that there are other things that you can do to keep your prices the same even during hard times. These methods are designed to keep your loyal customers interested in buying your product, but in some cases these tactics can be used to help bring in more customers.

Here are some things that you can do to help avoid having to lower your prices.
• Emphasize customer service – basically you are going to want to show your customers that they are important to you by demonstrating the added value that you give your customers, especially compared to other places. But what you are trying to do is justify your higher prices because of the awesome customer service that you are providing, but at the same time you are trying to keep your customers away from the competitors. Some of the things that you can do to show that you have better customer service than the other stores is to offer generous returns, longer than average warranties, free delivery, express ordering for regular customers, or any other customer service or care thing that you can think of that makes your company stand out. This is actually better than getting into pricing wars with other retailers because it helps you to build long term customer relationships, where as price wars actually leaves you tending to customers who are picky anyway and might not return again in the future.
• Package products and services together – this is a great way to help provide your customers with a great value. What you are doing is grouping together related products and then selling that entire group for a price that is larger than any single item, but is cheaper than it would be to buy all of the items individually. This is a great method to use because it can help you to avoid having to permanently reduce your prices on any one item at the same time you are increasing your overall sales.

• Decrease amount along with price – if no matter what is going on and there is nothing that you can do to avoid reducing your prices then what you need to do is to decide if it would be beneficial to offer your goods and services in a smaller amount, basically lowering your price and what the customer is getting at the same time so that you are not losing money. Basically what this method does is it allows your customers to think that you have lowered your prices, which is what they are seeing, but you as a company are still keeping your costs in line because you have reduced the amount of your product or service.
• Add services – rather than cutting your prices something that you can do is to leave your prices alone and then include an additional service along with the product for the same price.

In addition to using these tactics to avoid lowering your prices the most important thing that you can do to ensure that you don’t have to lower your prices and lose out on profits is to ensure that your prices are set right from the beginning. In fact having a good pricing structure actually helps you to generate sales and build customer loyalty, but having a bad pricing structure can cause you to lose profits and struggle to meet your customers needs. So when you are determining your price on your product or service here are some common mistakes that you should steer clear of:
• Underselling – this is caused from not knowing or understanding everything that is involved in producing your product or service. This includes both fixed and variable costs that are a part of your business. So you want top be sure that in addition to including the prices for the parts that you also include the price of rent and utilities, in addition to the value of your time. If you are in a service related business most companies tend to set an hourly wage and then multiply it by the amount of hours that it will take to do a job in order to get a project’s overall price.
• Following the competition – you cannot do this because not everybody is going to have the same costs that you are going to have. So in some cases you might make more money, but most of the time you are going to end up losing money because you will have higher costs than your competitor. But it is important to know what they are charging so that you will know if your price is realistic or not for the market. If yours are too high you might be trying to make too much profit, if it is way lower than you probably forget a cost when determining your price.
• Setting random prices – you need to be able to justify your prices so don’t just pull numbers out of the air. In some cases your customers might ask why it is you are charging this much when somebody else is charging a different amount. But also if you don’t understand pricing you will have a hard time understanding when you should or shouldn’t change your prices in the future
• Competing on price – this method is shaky at best, companies do it but it is not recommended. You will most likely attract more people to buy your products, but the chances are high that these will not be loyal customers. The reason for this is that it was the low costs that attracted them in the first place so they will probably bail when the more expensive prices come out. You are better off offering making your business stand out in other ways rather than low costs.
• Dropping prices without changing delivery – this can happen because of the fact that your customers are trying to negotiate a better price from your company. This is actually quite common when it comes to service based companies. And if you agree to give them a lower price from what you originally said it is sending the message that your price was too high in the first place and that you are always open to adjusting your prices. So what you need to do is to agree to the lower price but you have to change what the customers are getting for that price.

• Waiting too long to raise prices - no company wants to raise prices because that causes a problem like price reduction does. If you raise your prices you might lose a few customers, which can in turn lower your profits. But on the other hand if you don’t raise your prices you can end up losing profits in the end as well. Many times increased demand or the rising cost of supplies requires you to raise your prices. But rather than raising your prices all at once, or in other words one huge increase, you are actually better off raising your profits in small increases. And doing this most of the time your customers will respond better as well.

Not only are these common mistakes found in pricing your products for the first time, but they are also very useful to know about if you are thinking about price reductions. Because with price reductions you are lowering your product or services price, which is very similar to setting the price for the first time because you are determining the final selling price of your product or service. So in order to avoid the biggest problem of losing profits with price reductions you are going to want to make sure that you haven’t reduced your prices too far.
The problem with price reductions Part 2