Price discounting is a strategy often used by marketers to generate sales. It can be a great strategy to boost cash flow. It needs to be used at the right time and in the right way so that it doesn’t automatically erode profits or train customers to choose on price only or expect discounts.
When times get tough in business, dropping prices is often the first strategy that people think of. Right now we know that discretionary spending is down and sales are low due to cost-of-living pressures. Just a word of warning before you employ a discounting policy, take a moment to reflect. Dropping prices may not be the solution. Discounting can be dangerous for business.
Price is the only thing that can determine whether you make profit. If your price is too low then you may have sales but don’t have any profit. If your prices are too high then you have no sales. It’s a delicate art and science to get it right and it shouldn’t be messed with too often, or on a whim. Pricing is linked to brand and if you change your prices too often, it can start to erode your brand.
Before discounting consider these things
- Do you have a price sensitive market?
Have you tested to see if dropping the price makes a difference? Do sales generally go up when you have a price promotion or do they stay the same? If you are not sure you might like to do some testing first.
- Can you afford to drop your price?
Is there room in your profit margin to reduce your profit or will this make your business vulnerable? For example you might be a restaurant and with food costs rising, margins might have already been squeezed and there is no room for further discounting.
- Do you have high overheads or fixed costs?
Do your costs stay the same regardless of sales. For examples staff, labour, rent, energy, etc. You might be a retailer that is open 5-7 days per week, paying rent, power, insurance regardless of whether you have customers or not. You might be a service and you have to pay for time whether you have customers or not.
Some reasons to drop prices
- Strengthen relationships with your customers by showing empathy and helping in tough times.
- Keep cash flow coming into the business – you have fixed costs that need to be covered.
- Tap into the price conscious mindset
- Grow market share (if price sensitive market)
Reasons not to drop prices
- It has proven not to increase sales. You will end up just selling the same but making less money.
- It becomes unprofitable (no margin). There is no wriggle room you are already pricing as low as you can.
- You are a premium product or service.
- You don’t have a price sensitive market. Your customers might be businesses not impacted financially.
Other solutions
- Bring out a new cheaper product or modify an existing one. e.g. Bar Meals, Mini Facial, ½ Dozen, Smaller portions (Light Menu), Selected Stock, Off Peak Hours, Tight Arse Tuesday etc. It ultimately ends up being cheaper for the customer without reducing your profit margin.
- Use the money you would be spending on discounting on advertising your product or services to find new customers.
- Have flexible payment arrangements – consider after pay to make it easier for people to buy from you.
- Fixed Price Packages – such as $50 dinner for two.
- Discount with conditions – Happy hours, off peak days, Buy 10 receive 2 free, Book 2 and get 3rd free etc.
If you’d like to get some advice on your pricing strategy book a 30-minute session with Ailsa.
