When should you lower prices?
We maniacally notice every time strawberries change prices (celebrating… and buying when they’re under $6.99 these days). But most goods and services are not perishable commodities subject to daily price changes. For that majority, should prices ever go down?
The short answer is that price can act like a gate. When it’s optimized and straightforward, customers can file in in an orderly fashion. But sometimes it makes sense to consider a bigger gate, or more gates, or some other metaphor for changing up the people who are compelled to purchase. Lowering prices shifts who can walk through, and how they behave once inside. In other words, lowering prices isn’t, by default, failure.
Fundamental price shifts should be intentional in both directions, but all the more so when you are cutting. It’s more than running a week-long promotion or offering a one-time discount. When you make a price cut, it should be driving something specific (because it’s probably not, on its own, driving profit!).
Most of the discussions in our companies around price cutting start with talking about ways to open more doors. Is there something you offer that gives you a chance to form a long-term relationship? Is it important that you maximize your profit on an individual transaction, or that you build the relationship? Follow that logic, and there may be offerings to discuss.
The caution with lowering prices is that loss leaders are positionally precarious. Said differently, you can become popular based on a loss leader. If that’s ultimately what drives volume, you can end up upside down economically (just ask all the businesses that blew up via Groupon). So you want to consider price cutting a tool, and make sure the sales process is built not just to sell that thing. What has to be true after the sale for the math to work?
It’s also true that once you show a price can go down, you will likely train customer expectations in that direction. So if everyone knows you run rotating sales, they may wait for the sale. And for those in B2B, once your customer knows you’ll sell it for less, it will be an uphill battle to reset expectations later without a clear external justification. So be judicious.
As with most things related to price, testing is advisable. And testing can be small and incremental.
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