Why Dropping Your Prices Is A Recipe For Disaster

Can you recall a business you knew that seemed on the surface to be doing well and then ‘bang’, it failed? How about the one you thought was doing well as it grew and grew in multiple locations and then disappeared; known as growing, growing, growing, gone. Often the growth strategy or the survival strategy is to drop prices to get the wheels spinning. Things are busy lots of activity; the problem, however, is no profits. Ultimately an unsustainable business model and failure is inevitable.

Feeling disrespected

There is another strategy of dropping prices that has a major negative impact. Have you ever experienced a situation where you are a repeat and loyal customer of a business and then discovered they are offering great deals that are for ‘new customers only’? How do you feel when a new customer gets a far better deal than you do after all of your loyalty? The critical thinking behind these strategies is often short-sighted; it’s limited to the quick gains of sales commissions and bonuses for new customer acquisition. When this occurs, it’s an indication the management team is very self-focused and not at all thinking in the best interests of their #1 asset, their customer base. In many cases, this strategy brings in a new one-time buyer and losses an old long-term buyer that paid full price. A recipe for disaster and can destroy a business or its reputation.

Training customers to wait

Consider how often you see the media ads for 50% off sales or the seasonal sale that you know is just around the corner. What is the real price of a bed these days? Every week we see on TV the bedding sale of 50% off – ends Sunday. The problem with this strategy is that the retailer is basically training the customer to wait or ask for 50% off. The retail price is nothing more than decoration as we know we can negotiate hard if we need to. The fierce competition between suppliers can actually do more damage than good for their industry. When the market would have paid higher prices if they focused on delivering real value than a discount. The beliefs of many executive teams are seriously flawed and often dangerous to the health of the company. Consider Apple, when is the last time you can remember the storewide Apple sale? You can’t, as they never have one. They have built the worlds most valuable company on high-quality products and excellent customer experience.

Rule #1 Add Value

Instead of being pressured into discounting price, consider a better strategy of adding value to the deal. A few years back, we worked with a bicycle retailer; they had a great business with two successful locations. Their customer experience was the #1 strategy they consistently worked on, and they mastered loyalty. One of the big retailers opened up nearby and set out to destroy them by dropping prices. They were a seasoned business and knew their customers, so instead of $100-300 off the tag price, they added in $150-$350 worth of extras. They knew that every mountain, road, or everyday bike needed accessories, lights, pumps, spare tubes and tyres, repair kits, water bottles. The also added in a free 12 months service and free lifetime puncture repairs. Their process, when asked to match a price, was simple. They redirected the sale process to the total value of the deal and could show theirs was far better. They also protected margin as the give away’s where high margin and they could do great bulk buy deals from their suppliers. Supplier excess and clearance stock was a great way to build a high-value deal that stacked up far better than the cheaper price tag. They focused on demonstrating how they added value; any hack can give away price.

Know your numbers

Dropping prices is one of the great disaster strategies a business can implement. Firstly, the essential data to be clear on is the impact on the bottom line, so many failed businesses had their numbers wrong. It wasn’t the market; it was their lack of awareness around the real costs of their business the caused their demise. Make sure you have worked your numbers both forwards and backwards; ensure your accountant agrees that you can afford to do the discounting. So often, hindsight tells the truth about the strategy; it was doomed before it started. The key to remember is that dropping prices ads more pressure on your break-even point. Some companies ‘have more month at the end of their money’ (they can’t cover costs) than the essential ‘have more money at the end of their month’; profit.

Written by Darrell Hardidge.

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