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Cutting prices

Cutting prices

Image courtesy of xedos4 at Freedigitalphotos.net

This article was written by Ed Hatton and appeared in the October November edition of Destiny Man magazine

The economy is uncertain, business is slow and your competitors have slashed prices. Should you follow suit?

The simple answer is yes if that increases profit or improves cash flow through more sales. Also yes as a defensive move to retain irreplaceable market share and that retention is worth sacrificing profit for. Be careful of emotions here. Clinging to things that should go can kill your business.

No if your products are price inelastic, so a price reduction does not materially increase sales. Also no if it would be more profitable to reposition and increase prices and value to your customers, and take higher margins for lower sales.

If you cut by how much should you cut?
• Use a spreadsheet to show projected changes in sales volume and the resulting total gross profit at various price points to indicate if and where to cut.
• Try not to do across the board price changes. Mix and match, increase prices of nuisance products, cut the ones that attract customers to you.
• Don’t chase the lowest price competitor. He may be going out of business. Do you want to imitate that?
• Stop using round numbers like 5%. You want the best factor, and your spreadsheet will tell you what that is. Use it.
• Ask your customers. Questionnaires or chat will tell you where there is real price resistance or grudge buying. Those are the ranges to focus on.

And then continually review – did the plan work? Does anything need tweaking? Are customers happy?

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