Lowering Prices Could Mean Less Success

 

Your business is doing good enough.  You make enough money to pay your bills and provide for what your family needs.  You are floating along, enjoying this reward when you learn a competitor is lowering prices.  You are numb because this means they will take business away from you and now your bills may not get paid, your family and lifestyle may suffer.  This is not what you went into business for.  Now, what do you do?  Hint; it isn’t lower your prices!

Let’s start by ending a myth.  Lower prices do not equal greater success.  In simple fact, it could mean less profit, less success and the decline of the brand you worked so hard to create for your business.  Let’s look at an example of a 10% discount or price reduction:

Price of Good or Service$1000$900
Cost of Goods Sold (for One)$350$350
Gross Profit$650$550
Indirect Costs of business expenses and other Labor$500$500
Profit$150$50
Profit to Sales Percent15%5%

A simple analysis of this shows clearly that:

  1. It costs you just as much to produce or provide one regardless of what you sell it at (Cost of Goods Sold).
  2. Your Business expenses and other labor remain the same as well
  3. You’ve reduced your profit from 15% of sales to 5% of sales
  4. With a profit of 15% of sales, your business wasn’t producing as well as it should anyway. A good number is approximately 25% or higher)

 

From a volume perception alone one can easily see that you would have to sell 3X as much to match the profit you had before you decided lowering prices might be a good idea.  Remember that battling over price is a foolish action.  Remember that no matter your price, there is always someone who will sell it for less.

 

So what is the solution?

 

A SOLUTION BESIDES LOWERING PRICES

 

Earlier I mentioned your brand.  If you remember all of the hard work and effort you put into building a brand for your business you will find the solution there.

 

Your brand is built on quality.  Quality of product or service, quality of customer service, quality of exceeding the value your customers are seeking.  It is through the promotion of your quality that you win in this ill-advised battle over price.  We begin with what you can control.  You control your Cost of Goods Sold.  Commonly called COGS, this is all of the direct labor, materials, and expenses you have to produce or provide whatever you do to your clients.  Do not confuse your other business expenses such as rent, utilities, office staff, insurance and so forth with COGS.  When you look at your COGS, what can you make better?  Is the process somehow too long?  If so, can you make it shorter.  Are the right people doing the work or are the most expensive people doing the work? What about waste and error?  Are costly mistakes made?  Are you wasting materials?   Are your materials too expensive?  Can you find another provider or another way of purchasing them at a lower price?  The process is where you most likely will find the greatest opportunity for improvement.

 

When you finish all of that you have a cost of production or service providing that will let you break even and no more.  The next step is to include your Indirect Costs. Add those costs to your COGS and you now know what it costs you to produce or provide what you do.  Factoring in a profit is a math exercise that gives you the price.

 

Now you have a price for your product or service.  This is where what I call the Goldilocks process comes into your strategy.

 

GOLDILOCKS PROCESS

 

In the Goldilocks story, the porridge was too hot, too cold or just right.  Your price will be too.  Does that mean if your price is too low or too high that you are in trouble?  A simple NO, is the answer.  Ask yourself this question, depending on the too high, too low or just right position your price/cost is… What can I add to or take away from what I produce or provide that would make that price just right?

 

For example, you are a lawn mowing service and you charge $100 for a .75 acre lot.  In that service, you include edging, blowing of clippings off of driveways/sidewalks, refuse removal if created.  Could that be your top of the line offering and for $75 you offer lawn mowing and blowing of clippings?  For $50 you offer to mow only.  You now have a service that covers many price points that could gain you more business.  If you include the same high quality of product or service with those prices (your brand of high-quality product or service), the offering becomes of greater value.  Those seeking only price will go with price while those who know, understand and want quality, will remain with you.  It can be that simple.

 

No one ever wins a price war.  Price wars rarely even benefit the consumer except for short terms.  Quality of product or service declines during price wars, businesses lose profit and some even go out of business.  However, competing on quality with a broader range of prices is a solid strategy that protects your profits and as a result your business.