Cheaper prices can certainly make your products and services attractive to some customers – but are they are a sustainable business strategy? We’ve spoken with a pricing expert to debunk some common pricing myths.
If you’re like most small business owners, setting your prices can be difficult. While you want your products or services to appeal to potential customers, the long-term success of your business depends on making a profit. If you’re feeling confused about pricing strategy, you’re not alone.
We asked our business advisor Chris O’Hare about some of the most common myths about pricing – and how small business owners can find the right pricing strategy for their goals. Here’s what Chris shared.
Myth: If you’re launching a business, it’s best to start by offering the lowest pricing to beat the competition and then think about raising prices later.
According to Chris, a discounted launch price can be effective, if it is part of a well-researched and coordinated campaign, but this strategy should be used cautiously.
“If you plan to attract customers by being cheaper than your competitors, with the hope of raising your prices at some time in the future, beware of a couple of obvious problems,” says Chris.
These problems can include:
- Customers who are attracted to you primarily on price, will leave you, primarily on price.
- If you sell a lot of discounted products/services you may end up being incredibly busy, but making no meaningful profit, or worse, a loss.
“Think about why you might consider this was the best way to launch your product or service,” Chris advises. “Think about how long this campaign would run for and how you would leverage customers that this strategy attracted, into repeat or referral income?”
Beware of starting a price war
“If a business owner’s answer to the questions above reveals a ‘cheapest is best’ mindset, I would have concerns about the viability of the business,” warns Chris.
“I would question whether they had the resources to outlast established competitors in a ‘price war’ that they intentionally started.”
In this situation, business owners should explore the differences between expenses and costs and participate in some professional development, including our Understanding Business Financials and Pricing Work to Make a Profit workshops.
“These workshops are not designed for accountants – they are designed for start-up small business owners and they just might be the difference between creating a profitable business or going out of business.”
Myth: With costs of living and business expense going up, there’s never a good time to lower your prices.
Chris explains that you should ‘never say never’ when it comes to pricing.
“Using a dynamic pricing strategy with occasional use of lower prices or special offers, can be a great way to fill excess capacity, clear old stock or generate a short-term cash flow boost. Using aggressive pricing on a ‘loss leader’ can also be an effective method of attracting customers who are then upsold to profitable products/services.”
Always have a plan
“The key to successfully using discounting is knowing why you are doing it, developing a plan to measure the effectiveness against key performance indicators and regularly assessing the impact of the strategy.”
Chris shared this example of how lower prices can work well in some situations.
“Imagine you own a bed and breakfast and you know that you have two vacant rooms available for tomorrow night. Usually, you have a two-night minimum stay requirement at $150 per night. This to me presents a fantastic opportunity to present a discount for last minute bookings at $125, without the barrier of the two-night minimum. Imagine that you applied this strategy across the course of a year and managed to sell an additional 200 room nights. That equates to $25,000 revenue that you would not otherwise have generated.”
Chris noted that a potential benefit of this strategy is that it does not negatively impact any existing sales, instead it uses discounting to generate additional income that this business would have been missing out on. It could also increase exposure to customers who might have otherwise chosen a competitor’s offering.
“It is important that a strategy like this compliments an existing sales and marketing strategy, remains profitable, even if the margin is small, and is used to generate repeat and referral business, preferably at the full rate.”
Only drop your prices for the right reasons
“If you are dropping prices to generate cashflow because you are struggling to meet your financial commitments, you need to be very careful. While this can generate sales, relying on it as a regular sales tactic can be problematic. Constantly cutting prices may end up increasing sales, but at a level where margins are so low that they are not viable.”
In this case, Chris encourages business owners to conduct a comprehensive review of their product/service, target markets, promotion strategies, pricing strategies and delivery processes with the aim of identifying the underlying issues that are causing the financial pressure.
Myth: Pricing is the only way to stand out against the competition
According to Chris, conducting great market research is the real key to standing out from your competitors.
“Start by identifying and profiling your ideal customer. Consider what they want, what they value, how much they will pay, how and where to communicate with them. Then analyse your competitors, look at how they are developing, presenting and pricing products and services to attract the same customers that you are targeting.”
“If you do this well and regularly, you should be able to identify marketing and promotion opportunities to help your business stand out from the crowd, crucially, the opportunities that you identify will be based on evidence, not guesses.”
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Learn more about pricing for profit
“I often speak to business owners who set their price based on instinct, conversations with friends or purely as a reaction to competitor’s rates. They have given little to no thought to their fixed or variable expenses, costs of goods sold, profit margins or sales forecasts.”
Chris would love to see more businesses develop and use a robust process to set prices, then develop an accountable marketing and sales strategy to drive sales.
If you’d like to learn more about pricing, book your place in our Pricing Work to Make a Profit workshop or read Five pricing mistakes and how to avoid them.
You can also read about how to discount without impacting your profit margin and easy tips to increase your sales that do not rely on discounting.
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