Cut Prices in a Sluggish Economy? No Way

Cut Prices in a Sluggish Economy? No Way
by Rieva Lesonsky
reprinted with permission from the Microsoft Small Business Center

Q: This economy is really starting to affect my business. Business is down. People around here seem to be staying at home and not shopping. I’m thinking of cutting prices to bring people in. What do you think?

A: Don’t do it. Seriously, cutting prices seems to be the first thing entrepreneurs think about when the economy heads into a downturn. The reasoning is that this is the only way to combat the fact that consumers, clients and businesses are spending less.

Generally, however, this is not a smart strategy. It sends a bad message to your customers-they’ll likely think you’ve been overcharging them all along. Or that you’re desperate, which will make them wonder if your business is about to go under and if they should start doing business elsewhere.

If you cut prices, your customers may sit around, waiting for you to discount once (or twice) again before actually buying. Another danger is once the recession ends, your clients may object to your newly raised prices. You also don’t want to start a price war with your competitors where all players are likely to suffer. And finally, unless you cut your costs as well, cutting your prices will just lead to lowered profitability. And that’s a formula for disaster.

So what should you do? First, focus on value. Why do your customers do business with you? Do they come to you for discount prices, personalized customer service, cutting-edge offerings, products they can’t find elsewhere, convenience, innovative thinking or what? If you’re known, like Walmart, as a low-price leader in your city or industry, then you do need to maintain that mantle and cutting prices might be the best solution for you. If lower prices are not your value proposition, then move on.

Is there an added value component of your business that you can offer customers that won’t cost you much? If you own a retail business, could you have a service like free gift wrapping? A restaurant might offer a discounted appetizer or beverage with the purchase of two meals. An accountant might throw in a free financial assessment, while a marketing company could add a discount to a service to clients who purchase a whole package. A seminar, webinar or workshop could have broad appeal to all types of customers and clients.

Another possibility is to bundle some of your offerings (this works best for service entrepreneurs) and offer tiered packages priced accordingly. Think airline loyalty programs. Those who purchase the platinum package get more choices than those buyers who opt for the gold or silver packages. Or you could simply offer customers a discount in exchange for a long-term contractual commitment. You also might consider adding a new line or service offering-one that you can charge a little less for. It should be different enough from what you already sell, so you don’t cannibalize existing sales.

In times like these, it’s especially important to hang on to your current customers. So make sure whatever discounts you offer to new clients, you extend something equivalent to your existing customer base. Or provide incentives for contract extensions.

A recent survey from TNS Retail Forward said that consumers have changed their shopping habits in order to save money on gas. Over 25% of people have increased their online shopping, so if you don’t have a Web site, start building one immediately.

Before you resort to lowering prices, look for other areas in your business where you can shore up your financial situation. Are you current on collecting your receivables? In times like these, all businesses need a solid collection strategy. You might offer small discounts for timely payments. Check your budget often and look for other inefficiencies. Is your phone plan the best? Can you cut back on travel? Negotiate a better deal on rent? Hire interns or part-timers? Are you using energy-efficient lighting and equipment?

If you lower your prices, you’re going to have less money to reinvest in your business. You want to make sure you have enough cash flowing in to retain your good workers, keep your insurance coverages, pay the bills, build a cash reserve, update your technology, continue to innovate and not stay awake every night awash in fear.

And like I advised several months back, you want to make sure you have enough cash to maintain (or maybe even increase) your marketing budget. Smart entrepreneurs take advantage of recessions and try to do more than survive. If you hold tight to your pricing strategy and do more to increase your customers’ experiences, you can actually thrive.