Wednesday, June 23, 2010

The Fallacy of Price

A common misconception is that if you lower the price you will get more customers.  This is not always the case by anymeans and there are some significant downsides to playing the price card which you should consider.

High Noon in the Automotive IndustryNow, you might not really have an option - if your competition has cut their price to some extent you will be forced to match this to ensure that you are not priced "out of the market" - however if this is not the situation and you are choosing to cut your price without any prompting from competitors or customers, there are reasons for and against this action.

Companies that pursue this strategy do so for a variety of reasons including the idea  that lowering prices will revive their customers' wavering devotion and ultimately make the company better off. To defend the cuts, they cite changes in the competitive landscape, the convictions of upper management, a willingness to share cost savings and productivity improvements with customers, and the mistaken belief that lower prices equates to higher volumes. Because price cuts seem to offer the easiest way to lavish special treatment on customers, companies find the temptation hard to resist.

Now while some of these actions might be true there is significant justification in resisting the temptation.  Proactive price cuts don't make you different, nor do they make you better off. They make you poorer, unless you have the evidence, the data, and the math to prove otherwise.

Lets look at a simple example:

Price of your widget = $10
Volume sold = 100

Revenue = $1000

New price of your widget = $8 (reduction of 50%)
Volume sold = 150 (increase of 50%)

Revenue = $750 ... you would need to sell twice as many units ... an increase of 100% to achieve the same revenue you enjoyed before the price cut!

Beating Low Cost Competition: How Premium Brands can respond to Cut-Price RivalsThis holds true regardless of how you cut prices. You can cut them through outright price reductions, by offering coupons or cash-back incentives, and by heaping services upon your customers in order to clinch a deal or cling to an existing customer relationship.  Remember that in an established industry there can only be one cost leader ... in a mature industry in which competitors offer similar products based on similar technology and inputs, it may even be impossible for any company to achieve more than a slight cost advantage.

The key thing to remember is that you are in a business to make money AND deliver a service.  Your customer wants to pay fair value for the services rendered and they realize that if you went out of business they would need to go elsewhere. 
Post a Comment

Cancellation - the final step in a long and drawn out process

Dealing with customers that want to cancel is hard. I know - I'm personally in the midst of trying to cancel my Television/Internet serv...