Discounting product prices can whip up a storm and pique the interest of new customers, but slashing prices is not always an effective way to get your business noticed. While there are benefits of dropping prices and running promotions, discounting can cause problems.
If you’re thinking of trying to increase sales by decreasing the cost of services or products, here’s a useful guide to the potential pitfalls of cutting prices and some tips to help you employ more effective, alternative pricing strategies.
When you’re searching for products in a store, or you’re shopping online, it’s very common to stumble across signs and banners that advertise flash sales and once in a lifetime saving opportunities.
Offering discounts is a very popular ploy for businesses looking to expand their customer base and create a buzz around their brand. While there are potential advantages of offering savings, discounting can also represent a risky tactic.
Here are some of the most significant dangers of discounting:
1) Your brand image and reputation
Your pricing strategy won’t just have an impact on your profits. It will also affect the way customers perceive your brand.
If you’re a luxury brand, for example, and you’re aiming to attract wealthy customers who like the finer things in life, slashing prices and hosting sales all the time may not sit well with your clients.
Your strategy should reflect the ethos and values of your business.
2) Diluting Value
When you discount products, you might persuade some buyers that they’re getting a bargain, but others may question the value of your products.
If you can afford to lower the price substantially, for example, you may have customers asking themselves whether the items you’re selling justify a higher price tag.
There’s a difference between price and value for money, and customers want to make sure that they’re getting good value for money on every purchase they make.
3) Setting A Precedent
If you start to attract attention by running promotions, there’s a risk of setting a dangerous precedent. If customers have bought products or services from you at a lower price, they may be reluctant to order again when prices increase again.
If this is the case, you might find that a client shops around for a better price from a competitor, or that they wait until you decrease your prices again.
When consumers know that a business offers deals on a regular basis, they tend to wait for promotions to come around, rather than buying at full-price, and this can affect cash flow, as well as turnover.
4) Discounting Price Wars
It’s always wise to keep a close eye on your competition, but getting embroiled in price wars can be costly. If you’re susceptible to dropping prices spontaneously in order to compete, you may find that your business becomes trapped in a tug of war with your customers stuck in the middle.
5) Falling Profits
Offering discounts can be beneficial for businesses, but there is a danger of going too far and putting your profits at risk. Every business owner should aim for a healthy profit margin.
If you lower your prices too much, you may find yourself in a situation where your pricing strategy is causing you to lose money. Every item has the potential to generate profits when it is sold at a mark-up. When the margin narrows, it becomes increasingly difficult to balance the books. Before you consider offering a discount, make sure you calculate potential profit margins at lower prices. A flash sale should never result in you losing money. If you slash the cost of a product by 50%, for example, this means that you have to double the number of sales to produce the same profits.
Alternative pricing strategies:
Offering discounts is often touted as a means of enticing new customers and keeping hold of existing clients, but it can be a double-edged sword. Rather than implementing a strategy that focuses on discounting items on a regular basis, you may wish to consider these alternative pricing strategies:
Concentrate on value
Many businesses focus on the numbers and recommended retail prices, rather than concentrating on value. The reality is that consumers and business clients want to feel like they’re getting the best value product or service. The price isn’t always a priority, and many customers will live by the mantra that ‘you get what you pay for’. Focus your campaign on adding value to your customers’ lives and ensuring they understand that they’re getting the best offer out there based on the quality of the product or service you provide. Outline the advantages of buying from your business and up-sell your USPs.
Loyal customers are the holy grail for businesses. If you have clients that order from you on a regular basis, you should always go the extra mile to keep these customers on board. These are the individuals who are likely to recommend you to their friends and family, to stick with you if new competitors come onto the scene, and to leave positive reviews. It’s also easier to impress loyal clients than it is to attract new customers. Rewarding loyalty offers a raft of benefits. Customers feel like they’re being treated like VIPs, rewards can cement and strengthen relationships between businesses and clients, and customers feel like they’re getting more for their money. Rather than running flash sales or dropping prices, consider implementing a loyalty scheme, which offers incentives for repeat business or for recommending the company to a colleague, friend or social media contact.
When you run a business, you want to impress new customers, but you also want to maximise your chances of keeping hold of that client. Building offers and packages is an excellent way to encourage loyalty and to keep in touch with new customers. You can offer savings or special offers as part of a bundle or package of services, for example, or for a series of orders. This way, you’re offering a metaphorical carrot, but you’re not damaging your profit margin.
You often see businesses cutting prices and running offers to drum up interest and drive sales, but discounting is not always a favourable pricing strategy and sometimes other alternative pricing strategies can be more successful. We at Maple Accounting can help.
If you’re looking for effective ways to impress customers without denting your finances or damaging your reputation or brand image, hopefully, this guide has given you food for thought. Or if you need further help just drop us an email by clicking here or call 01332 207336