When price cutting seems like the only option for small businesses … hold your nerve

Working with small and medium sized business who are facing challenging times and increased competition I often hear the view that they need to be price competitive. This usually means price cutting, discounting and squeezing margins. As one of the cornerstone’s of marketing, pricing can be one of your most powerful marketing tools and it is possible to appear both competitive and still protect your margin.

Price will always have the biggest impact on the bottom line.

For example, if you had a product that sold for £10 and cost you £8. Your margin is £2. If you discount that by only 5% that takes your margin down to £1.50 and all of a sudden you will need to sell a third more products just to remain the same. If you discount by 10% you would have to sell twice as many. Does it make sense that a 10% discount will double your sales in this scenario? Probably not – so why do it!

Price cutting can have a tactical role, to get rid of surplus stock or to have loss leaders for example, but remember that if you drop prices across the board, or get sucked in to regular discounting it is very difficult to take this away from customers and put your prices back. This is especially the case in B2B as customers may expect deals and negotiations on future work or projects driving your margins down further.

So what is the answer? Give more. It is a myth that customers always go for the lowest price. If that were so there would be no premium brands in our homes and offices. Why do we buy BMW or food from M&S? We can argue better quality or design but the fact is that these elements have been ‘sold’ to us as having a value that justifies the price.

So in your business ask what you can give to add value to your product and service. Can you demonstrate a return on investment? Can you show extra features or benefits that take it apart from the standard? Can you sell extras and options that allow you to headline an entry level price whilst retaining the margin?

Another strategy is to be clever with your pricing structures and offer bundles or packages such as monthly payment plans that allow them to spread the cost and overcome the barrier of large upfront investment. Or having surcharges for add-ons (although maybe not as extreme as the likes of Ryan Air have done). You need to think about what your customers would expect to be part of the prices and what will they understand and accept as a surcharge, such as express delivery for example.

Pricing Tips

Do understand your market and the true price sensitivity of your customers. What is important to them?

Don’t apply a blanket pricing strategy. If you trade within different sectors you need to address each separately

Do be clear in your pricing. Half the battle, especially in the service industry and B2B, is being able to breakdown the price and explain what they are getting for the money

Don’t discount your products just because your competitors are. This can easily lead to a price war where no one wins.

Do look at price architecture within your business. Do you need a loss leader or known value items such as the loaves of bread and bananas the supermarkets use to demonstrate price competitiveness? Having a good, better, best structure can allow you to trade up whilst still appearing competitive.

Don’t assume a price cut and the increased sales will mean an increase in profit. You may just be working for nothing.

Do have confidence in the value of your brand and service. If you believe it is worth the money; your customers will too.