Is Lowering Your Price More Trouble Than It’s Worth?
Thinking about giving a discount? Before you seek an easy win, a quickly signed agreement or a short-term increase in sales, ask yourself, could lowering your price be more trouble than it’s worth?
Affecting Profitability Lowering your prices means you’ll need to increase your sales volume in order to compensate for the discount. As the table shows, a negligible discount of 10% means that, based on a 30% gross margin, you’ll need to increase your sales by a huge 50% if you want to achieve the same level of profits.
Damaging Your Brand How often do you see a discounted product and think, ‘it’s on discount because they obviously didn’t sell enough, it can’t be that good.’ How much do you compare, rightly or wrongly, the quality of a product based on it’s price? Take Pak’n’Save, the prices are cheaper than that of New World and so often it’s assumed to be of a lower quality. You don’t want your brand to be perceived in this way.
Creating Expectations By offering a discount your customer starts to expect a reduced price, even if you tell them it’s for a limited time only. You don’t want to be constantly negotiating prices with your customer. Nor do you want them to leave when you see you don’t have a discount on, for example, we’ve come to expect that Briscoes will always have a discount, so when they don’t have a sale, we don’t shop there.
Starting a Price War
No one wants to see their competitor offering lower prices than them. So what do they do? They drop their prices even lower. And what does the first company now see? Their competitor offering lower prices. So what do they do? They drop their price even lower - you see where this is going.
Here’s a scenario, you offer a discount to a customer working for construction company A, they leave and head to construction company B where they expect the same discount that you initially offered; but not before they tell their replacement at construction company A that your company offers discounts. So now both companies expect a reduced price and that’s if they only talk to one person.
Think about the sort of customer who only buys discounted items or services, chances are they have no loyalty to the brand, only the price. As soon as the price goes up, they’ll be gone looking for a bargain elsewhere - potentially your competitor, who has just reactively dropped their price.
What do we suggest?
If you are wanting to implement campaigns to create actions or look at providing ongoing loyalty discounts then talk to us and we will work out the numbers around this and ensure you’re achieving the result you want.
A helpful table...
Grace Team Accounting isn’t just a Tauranga accounting firm. Alongside our stock standard accounting services we also offer strategic business planning to help you future proof your business.