All successful business owners understand that promoting their business should always be a top priority in any industry. While that might be true, many of them assume the best way is to discount their products or services. Although placing discounts on everything might drive more sales in some situations, it is not always the best strategy, and there are disadvantages that you should consider before offering discounts. Before you decide to run out and slash your prices, understand some of the downfalls of this tactic. Make sure discounts are the right move for your company, rather than a step that could hurt your business.
Hindering Business Growth
When you decide to get cut your prices, all you might be doing is leaving money behind. You could be making your overall business more vulnerable. If you still have a new business, it’s wise to look over what might happen once the promotion is over. Reducing the revenue per sale needs to be offset by an influx of immediate and long term sales. And if the benefit is not in sales numbers, then a lower cost per unit. If per unit cost reduction is an integral part of the drive behind discounting, perhaps alternatives, such as overhead costs reduction, maybe more helpful. We have an article that looks at this approach, in particular for small businesses.
If you are not confident that your business will end up ahead by lowering the prices, you could end up leading your overall company backwards and place it at risk.
Branding your company, products, and services is another essential part of being a business owner. If you are trying to brand your products for high quality and reliability, handing out discounts might give the impression that they are not that great. Consumers understand that quality products are more expensive than cheap and unreliable stuff, and they are happy to pay extra for the peace of mind that what they bought is top of the line. For example, would the prestige of BMW be what it is if this brand was known for its regular discounts? Would you value the information and analysis of the FInancial Times if the price was the same as the tabloids?
So don’t sell yourself short. If people start thinking your stuff isn’t good, you will lose business in the long run.
Head to Head With Competitors
When you start cutting prices, not only do your customers notice but so do other businesses that offer similar services. If you decide to start selling a particular product type for 25% off, another company might start lowering their prices even lower, triggering a price war with you. If your business is not ready, you might end up losing the battle and any new customers you could have had just by keeping your prices the same.
If you plan to lower your prices to attract new customers, understand that it doesn’t always work. You might end up just making the same amount of sales but with lower profits. If your future customers see that you are having a promotion, you might make more sales upfront but then have a significant decrease in sales, which averages out to your usual amount.
The bottom line is, don’t assume that lowering your prices will be a guaranteed way to get ahead. Understand it can backfire and if you realise it’s not a good idea, look for alternatives to achieve your goals. Discounts may work, but ensure a plan is in place to minimise the chances this will hurt your business. A well-established process that can help in this analysis is SWOT. We have a whole article looking at this business tool, which may help with price discounting.