Whether you start a price war or respond to one, you will pay heavily in more ways than one if you ever discount your prices.
The Dangers of Discounting are clear. A small discount has a huge impact on your profit margin and you will have to work very hard to recover the potential profits thrown overboard in a discount.
It is called a discount the first time you do it. It is likely to become a price war as soon as either you or a competitor moves to match a lower price. It all happens too easily.
Price wars are fuelled by fear – the dread that you will lose the sale if you don’t match the competitor’s price. That is understandable, but it is all based on a lack of confidence in the merits of your product.
Now, there may be good reason for that uncertainty. Maybe your product is not the best in the market. If that truly is the case, then a price war may have a good outcome after all. It may force you either into a new market or push you towards developing a new improved product. Such change may be the only way to hold back the Darwinian forces besetting your business.
While we are on the subject of markets, think about the effect a price discount is likely to have on your market.
First, it tells your customers that your product is just another commodity where price should dominate their purchase decision. Do you really want to be just a commodity?
If your product merits confidence, it is clearly much better to position your product as an item which has added value. Display your confidence that your product possess some intrinsic merit that warrants a higher price.
Women’s cosmetics are a good example. Cheap face crème comes in a large container with a small price. Put roughly the same ingredients in much smaller container, wrap in it nice packaging and give it a classy name and you can sell it at a huge mark up. Essentially a small amount of the same substance can be sold at a price that is a multiple of price of the cheaper packaged brand. It says much about human nature, the power of branding and the irrationality of buyer behaviour. The end result is a skincare industry worth around $7 billion.
The audacity of charging much more for far less is all about brand confidence. Such brand positioning tells a story to the buyer. It espouses a belief that this item is worth more, far more and as buyers we fall for it… regardless of how irrational their valuation is and how much we suspect its validity.
Consumers want to believe additional value and benefits can be attained, if they are just willing to part with some extra cash. They want to believe they are special and they may get a certain satisfaction out of spending money on themselves. Their retail therapy regime may even be heavily reliant on such instant gratification.
What will a price discount say about your product? Will you lose credibility or prestige in the eyes of your customers?
A price drop could mark a new price line – a lower starting point when your customer begins their next round of price negotiations. Once they know you are a soft touch and that you are willing to drop your prices to get a sale, you can expect them to come knocking on that same door next time.
Another large danger also lurks. If your competition is of a similar mindset, there is a risk that they also drop their price to hold onto their chunk of the market. It could lead to a deadly race to the bottom where you both frantically discount your way into oblivion.
The only thing that will sustain a company in the end is profit. Not market share. Not product reputation. Not customer goodwill. Without revenue you will eventually have to start cutting expenses. The math is simple. Things will eventually deteriorate unless you have abundant capital or other products that are subsidising your operations. Survival will then depend on the depth of the cuts and what people, resources or assets you have to throw overboard to stay afloat.
Business is about making money. Despite all the administration, strategy and processes involved in running a business and all the frenetic activity it demands of you, if you are not making money… you will drown. It is just a matter of when.
Photo by Gianni Dominici
About Mark Toohey
