Is it a good idea to cut your prices when times get tough? When money is tight, it might seem that lowering your prices would be the thing to do. Customers are bargain-hunting, and you may think lower-priced competitors will eat your lunch unless you offer an even better deal.

But it's not always that simple. And sometimes lowering your prices could end up doing you more harm than good.

Sure, you might feel you're being forced into it. When all your competitors have lowered their prices, and you're hanging out there as the most expensive alternative, you might feel as though you have to match their price cuts.

But before you run to the stock room to retrieve your pricing gun, consider this:

Even in hard times, not everyone shops price. And when people do shop price they generally don't shop price alone. They still understand worthless junk is a waste of money, no matter how cheap it might be. Especially when times are tough, people want to be sure they get good value for the dollars they spend.

How you price your products and services plays a huge role in how your business will be perceived by others. Before you rush into cutting prices, consider the implications carefully to ensure you don't damage your reputation and your brand. The perception your customers and prospects have of your business can be more powerful than you might think.

Perception is Reality

I ran across an interesting study not too long ago. A researcher named Dr. Antonio Rangel of the California Institute of Technology told participants they were going to be rating five wines ranging in cost from $5 a bottle to $90 a bottle. He told the participants the price as they sampled the wine, and asked them to rate how much they enjoyed the wine. But Dr. Rangel and his colleagues not only asked the participants about each of the wines, they also measured each participant's brain activity, specifically in the "pleasure center" of the brain. With this set-up, they could objectively compare each participant's level of real, physical enjoyment.

Not surprisingly, when most of the participants sampled what they were told was more expensive wine, they said they enjoyed it more -- and, indeed, their brain-wave activity showed they weren't just saying that to be nice. They really did experience more pleasure when drinking what they thought were pricier wines.

The only thing was... there were only three wines, not five. Dr. Rangel served up two of the wines twice at different prices. Turns out, when people were told a wine cost $90 a bottle they enjoyed it more than twice as much as when they thought it cost $10 a bottle... even though it was the same wine both times.

See, Dr. Rangel wasn't taste-testing wines. He was testing how much people's perception influenced their physical reaction. And, it turns out, what people think can (at least to an extent) actually become their reality.

The Wal*Mart Effect

A lot of people I know, when they talk about shopping at Wal*Mart, are almost apologetic about it. "I know the stuff there is crap, but it's so cheap I can't resist," they'll say. The only thing is, in many cases Wal*Mart carries the same quality brand-name products as other hardware stores, toy boutiques and grocery stores... but they've made their reputation as the place for "always low prices," and for at least some people the perception is: cheap = junk.

And the interesting thing is, some people just won't shop at Wal*Mart no matter what. They voluntarily -- in full awareness of what they're doing -- go to a higher-priced store so they can pay more to buy the exact same stuff they could buy for less at Wal*Mart. They'll come up with all kinds of reasons to explain (or at least rationalize) their behavior: the other stores are better-organized, or they have nicer sales associates, or they're in a more convenient location, or whatever.

Now, Wal*Mart can get away with rock-bottom pricing because they're huge. They have the clout to negotiate concessions from their vendors the average person or business can't. And with the volume they do, even a few pennies per item sold can translate into zillions in total profit. So they're happy to target the penny-pinching cheapskate shoppers like me. They frankly don't care if some people perceive them to be a purveyor of low-quality merchandise. They can cry all the way to the bank about the unfairness of it all.

Doesn't quite work that way for the rest of us, though.

Pricing to the lowest common denominator is potentially a workable strategy if you're looking to make spare cash running a weekend flea market stand. It's almost certainly a mistake if you're trying to make a full-time living from your business.

The economy is going to get better. And when it does, you may not want your products or services to be locked in the bargain basement while your competitors have moved into the penthouse suite. So be careful. The pricing decisions you make now can have long-lasting repercussions for your brand.

A Value-Added Proposition

Of course, if your prices are waaaay above everyone else's, you may have to adjust downward to stay in the ballpark. But you certainly don't need to price lower than the competition! Nor do you want to -- at least, not if you value the long-term health and viability of your business.

Before you rush headlong into dealing with a down economy by trying to drastically undercut your competitors' prices, try this instead: add value to attract and retain customers without resorting to bargain basement pricing.

There are likely any number of "bonus" items or services you can offer that your customers want, but that won't cost you an arm and a leg. Give them at least some of these things, and you can position yourself in the market as a premium provider -- thereby justifying higher prices (and higher profit margins) for you.

Its what smart retailers do when they find themselves in competition with Wal*Mart. They don't try to beat Wal*Mart at their own low-prices game. That's almost certainly a losing proposition, thanks to Wal*Mart's size and volume business.

No, they keep their prices at a profitable level and instead help potential customers rationalize spending more with them by giving them reasons to justify the extra expense. Remember, there are customers out there who really don't want to shop in the bargain basement. So help them out! Save them from the work of coming up with their own justifications to buy from you and hand them a bunch of ready-made reasons on the proverbial silver platter. Use your marketing and advertising to spread the word -- "Those other guys may brag about their low prices, but we give you better value for the money."

Offer your customers value-adds the bargain-basement gang can't afford to give them. Real honest-to-goodness personalized service. Hard-to-find merchandise. Luxury amenities. It needn't be a huge thing -- might be as simple as always having a platter of fresh-baked homemade cookies and a pot of hot coffee on your reception desk. Giving everyone free same-day delivery as a matter of course. Offering to meet them at their home or place of business instead of making them come to you.

Remember, what they perceive about you will become their reality. When they perceive you're the one who cares about their needs and their concerns and their comfort, you'll earn some incredibly loyal customers who don't mind paying a little extra to do business with you.

Talk to your customers. What can you offer that they need or want, but aren't getting from your competitors? Think about ways to become not the vendor who cuts back when times get tough, but the vendor who adds value, and your brand will be positioned to fly higher than ever when the economy picks up.


October 29, 2008





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Comments(8)

Great analysis. The first "gut reaction" to lower sales or a tough economic environment always seems to be to decrease the price. I know firsthand it doesn't work. In my experience, price is just one factor people use when deciding to make a purchase - it's never the only factor. Working harder to show the true value of the product has always seemed to be the better option.

Plus, once easier times arrive, it's nearly impossible to go back to regular pricing because once a customer is accustomed to the lower price they'll jump to the competition when you do try to get back to higher pricing.

Tim Bourquin, Co-Founder
www.SmallBusinessExpo.com

While I agree completely with the premise of this article, I wonder how the experiment would have gone if the people tested had to buy the wine? Would the unpleasant aspect of paying $90 override some of the pleasure aspect of drinking the wine?

@Tim - good point about having a real hard time raising prices on down the line. Once you've set customer expectations you're the "bargain" provider, it's very difficult to re-price to a higher level.

@JB - good question! The way I see it, though, as a business owner, if you go around selling $90 bottles of wine for $10 because you're afraid customers won't pay the higher price, you're kinda shooting yourself in the foot. When you sell everything below your cost, it's hard to make that kind of loss up on volume. :-)

My theory: unless you can sell what you offer at extremely high volume, don't target the kind of customers who strictly shop price. They're not interested in your value proposition, just on spending the fewest dollars, so they're not going to give you enough of a profit margin to make it worth your while. For most small businesses, it's nearly impossible to make a good living with the lowest-price-in-town approach.

Locate the oneophiles and demonstrate you have the high-quality wine they're looking for. If you convince them the *value* of what you offer equals or exceeds the price you ask, they'll consider the $90/bottle a fair cost for what they get.

Thanks for stopping by and taking the time to comment!

Hello,

I really appreciate your article. But I would like to know, for a small business, what option is there other than to cut down his pricing, in tough times.
Planning for long term is OK, bu you need to atleast get your operational costs covered up.


Looking forward to your expert comments.

@shalabh Uhmmmm... I think that was the whole point of the article. Small businesses DO have alternatives to lowering their prices, even in (especially in) hard times. Unless your prices are suddenly waaay out of line with the market, it's almost always a better idea to focus on adding value instead of cutting prices.

It's not just "long term" planning. Even in the short term, you can make more profit by taking an "added value" approach.

Personally I think a lot of people on the internet are not making the money they should. Many times I see pricing that I would bet is actually loosing money. I think a significant part is newer businesses, that are not selling anything and instead of realizing that they are not getting customers to their website, immediately think it is price and start lowering their price and many tend to do it too much. I think that many miscalculate their profit. Profit is NOT sales price - cost. At the very least, about 3% (as average) should also be deducted for credit card processing fees. Most are drop shippers and also forget to deduct the drop fee. For example, the average new store owner would probably think a 25% markup would be a good profit and it would be for a higher priced item. But how about the lower priced items? One of the largest wholesalers charges a $3 drop ship fee. Some charge $4, $5 and more. So for a $20 product the new store owner charge $25 thinking they make $5 on the item. I have had people actually tell me this. The truth is, they do not come close. When they sell it for $25 and pay a $3 drop ship fee and another 3% for credit card processing fees, their real gross profit $25 - $20 cost - .75 processing fee = $1.25 which is no where near the expected 25%. It is ONLY 5% and that does not include the cost of returns for that particular item. We decided a long time ago not to compete on price (although we do pay attention to price). In fact when we get a call asking us to beat someone's price, we politely tell them to go back to the store they got the price from and make their purchase. We think customers should shop for bargains, but we do not support the back and forth bartering. The reason is simple. It is not worth our time. Who would want to get call after call asking you to beat someone else's prices? We are NOT a flea market, nor do we want to be. And we certainly do not mind loosing a sale or 2 now and then. So cut your prices if you want to, slash them to the bone, it is your right. But on lower priced products, we would rather sell 1 item and make $20, then to sell 5 items and make $4 each. Way less work, less aggravation and less returns. And yes, we are very profitable and have been since we stopped pricing to beat everyone else.

Diane, thanks so much for this insightful post. Our new start-up in smack in the middle of setting our pricing strategy and this really hits home. I absolutely agree that perception is much more important than reality when it comes to pricing. Look at companies like Amazon.com that call their strategy "value pricing." Value means the consumer feels like they are getting a fair price for the entire experience, not necessarily the lowest price. Our new start-up will be competing against Walmart (Alice.com), and we intend to do exactly what you've mentioned in this post.

@Frank - You are so right! If more small businesses paid closer attention to their REAL cost of doing business, I suspect they'd be a lot less inclined to cut prices so close to the bone. Good point as well about how you have to work so much harder to make ends meet when your profit margin is low.

@Mark - I love this: "Value means the consumer feels like they are getting a fair price for the entire experience, not necessarily the lowest price." Good luck with your start up!

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Search Engine Guide > Diane Aull > Marketing in Hard Times: Pricing