Customers love a good bargain. But for a small business, deciding on a price that will lure shoppers while still generating a profit is a difficult endeavor. After all, if you price a product too low, a deep discount can significantly eat into a company’s profits. At the same time, by failing to offer an appropriate price cut, you might push consumers into the arms of competitors.
While there’s no secret formula for setting a price, successful small businesses watch out for the dangers of deep discounting. Read what today’s experts have to say about seven important risks of constant price cuts.
Price sensitivity. Selling your products and services at a fraction of the cost can drive consumer price sensitivity, affecting shoppers’ buying preferences and encouraging them to pinch pennies rather than part with their hard-earned dollars. “You’re attracting a discount coupon shopper and that’s not how you make money,” warns Bob Phibbs, a retail consultant and author of Groupon – Why Deep Discounts are Bad for Business. “With constant discounts, the only way you’re going to keep customers coming back is by giving them equally as big a discount every time.”
In fact, according to a recent Retail Systems Research report, Retail Pricing In a Post-Channel World, 67 percent of survey respondents report consumer price sensitivity as a top-three business challenge, up from 46 percent in 2010.
Eroded profit margins. While price chopping pleases shoppers, it can drastically eat into a small business’ profits. “Companies don’t run on revenue; they run on profit,” warns Brad Sugars, founder of business coaching firm ActionCOACH. “The moment you start discounting, you lose a lot of your profits.”
Phibbs agrees. “When we give these deep discounts, we kid ourselves and say that it’s because the economy is bad or we need the money. But what we’re essentially doing is giving up on being able to charge full price.”
Lost customers. Consider the loyal, long-time shopper who purchased a blouse in-store for $80 and then discovered that her neighbor purchased the same item on the company’s website for $60. Chances are, you’ve not only angered that loyal customer, but you’ve lost her to the competition. By failing to consistently cut prices across multiple channels, Phibbs says, “Your loyal customers are going to wind up very upset with you. That’s because someone who hasn’t made you successful is now getting a better deal than them.” Instead, Phibbs recommends that small businesses “understand that it’s about getting people who already love you to come back more often.”
The wrong customer. Face it, says Sugars: “The simple reality is there are always going to be people who go towards the best price.” But do you really want those folks to be your key customers? According to Sugars, small businesses that heavily discount their products and services will “start attracting a type of customer who isn’t there for the service, the loyalty, or the value you add; they’re there for the price. The moment you start targeting these price shoppers, your quality customers will be long gone.”
What’s more, this discount pricing strategy may devalue your brand’s ultimate appeal. American automakers learned this hard lesson during the early part of the last decade, when their heavy reliance on incentives to sell their cars temporarily boosted sales but sent the wrong, long-term message to consumers. As Claes Fornell, director of the National Quality Research Center, explained in a Ward’s Auto article from that period, consumers began to perceive non-discounted vehicles from imported brands as having more value than the price-chopped domestic brands. “And once you start discounting it's hard to get out of the habit, and consumers come to expect it,” Fornell noted. “Discounts are a two-edge sword and have a negative effect. Low price contributes to a low opinion.”
Price wars. Pricing your products competitively is key to running a successful business, but not if it means engaging in an all-out war where business owners lose perspective. “There’s always somebody out there willing to give a lower price than you—I don’t care what it is,” says Phibbs. “But it’s a bad rabbit hole to go down.”
Ignoring the obvious. A trap that many small business owners fall into is focusing more on competitors’ prices than on their customers’ needs. “Learn how to sell,” advises Sugars, whether that entails offering customers special services such as home delivery, or refining your sales pitch. “At the end of the day, the best stores are going to curate the best customer experience,” says Phibbs. “And by giving people the experience they want, customers are going to drive past a competitor to get that experience again. He cites customer-conscious companies such as Lululemon Athletica and Victoria’s Secret as businesses that are “hitting on so many levels that are right because the customer experience isn’t just okay, it’s great.”
Overlooked alternatives. While Phibbs and Sugars agree that there’s certainly a time and a place for a deep discount, many small businesses make the mistake of overlooking more cost-effective alternatives to price chopping. “Get rid of the slow-moving merchandise on clearance sooner, make sure your employees know how to sell the merchandise that you think is going to move, and be willing to put the resources into providing an exceptional customer experience,” advises Phibbs.
From eating into profits to angering loyal customers, deep discounts can have a calamitous impact on a small business’s bottom line. To be sure, companies need to offer customers price cuts every now and again. But by satisfying consumers’ desire for the best price possible while creating a positive customer experience, small companies can grow while keeping their coffers intact.