Cutting Prices
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Cutting Prices

Q: With business slow, it seems like it might be a good idea to lower prices and cut our fees. However, I am also worried about eating into my profit margin, which is already pretty thin. What do we do?

— TJ

A:  I love this quote from the late, great Paul Harvey: "In times like these, it is good to know. .. that there have always been times like these!"

Sure, we have all heard that this Great Recession is the worst economy in 50 years, and it is, but that does not mean that there have not been equally bad times to be in business, because there have.

And what works in times like these? You bet, discounting.

Consider 1974 if you will. That year, new president Gerald Ford had to deal with an ongoing, expensive conflict in Vietnam, a quadrupling of oil prices, a huge drop in the stock market, and 11% inflation combined with stagnant growth — or "stagflation".

With the economy in such bad shape, it hardly seemed like a time to start a new business, but that is exactly what Dennis Brown did, and he succeeded because he tapped into the economics and mood of the time and created a business that offered low, low prices.

Specifically, Brown opened a new motel in Aberdeen, S.D., and set prices at a mere $8.88 a night. By 1979, he had more than 70 hotels in his chain, and today, Super 8 Motels is one of the world's largest discount motel chains with more than 2,000 locations.

So yes, low prices can work, and work big time. Many businesses in fact tie their brand to low prices and succeed as a result:

  • Wal-Mart
  • McDonald's
  • Amazon.com

So the question is not whether lowering your prices can work, sure it can, instead, the question is whether lowering prices can work for your business.

Lowering prices does not work for every business, and the one time that cutting your fees usually does not help much is when you have a high-end brand. BMW could gain little by suddenly selling their cars for a lot less because its brand is based, at least in part, on expensive luxury. Discounting would cannibalize its brand.

That said, the low price strategy often works for plenty of small businesses, especially in this type of economy. People are shopping right now. They want a bargain. If you are not willing to give them one, then they just might take their business elsewhere.

I have often said that one key to business is to ask people what they want and then give them what they want. I bet if you asked your customers what they want, today, many would say lower prices. So you better consider giving them that.

And as you do, you have to be careful how you do it, and how much you do it. Lowering prices will bring in more people, but it will also eat into your margins. Crunch some numbers before diving in.

One good way to start is choose a loss leader. That is, pick a product or service that you think would be more popular if you put it on sale, and then put it on sale. The idea is to attract attention and entice customers and clients to your business with a great deal. The loss of profit on that item should hopefully lead to more sales of other things, hence 'loss leader.'

Aside from the loss leader, discounting prices can take many other forms:

  • It might be a regular sale
  • It can mean bidding on projects lower than you normally would
  • You might even start offering discount coupons

Whatever tack you take, be sure that you let your actual and potential customers know that you are in fact giving them a deal. Mention it in your advertising or when you are chatting them up.

Low prices are a big selling point today, and if you do it, take full advantage of it.

© 2010 Steven D. Strauss, America’s small business expert.” www.MrAllBiz.com