Why dropping your prices is a recipe for disaster

prices drop
A woman holds a red arrow down over wooden blocks and the word Price. Concept of falling market value. Promotions and sale. Reduced prices for housing and food. Dumping. Low prices

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? Often the growth strategy or the survival strategy is to drop prices to get the wheels spinning, lots of activity; the problem, however, is no profits. Ultimately an unsustainable business model and failure is inevitable.

Feeling disrespected

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 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. 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, 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 per cent off sales or the seasonal sale that you know is just around the corner. The problem with this strategy is that the retailer is basically training the customer to wait or ask for 50 per cent off. The retail price is nothing more than decoration as we know we can negotiate hard if we need to. The market would have paid higher prices if they focused on delivering real value than a discount. When is the last time you can remember the store-wide Apple sale? You can’t, as they never have one. They have built the world’s 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 whose 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. 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, 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 that 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.

Darrell Hardidge, CEO, Saguity, and author of “The Client Revolution and The 10 Commandments of Client Appreciation”