One of the pillars of any marketing campaign is the pricing. It comes right alongside the development of the product, its positioning, and the venue where it is sold. When it comes to a price reduction strategy_,_ you have a couple of options. You could either go for a temporary reduction in price, which would be a discount, or you could reduce the pricing permanently. Both temporary and permanent price reduction strategies have their own benefits and drawbacks.
Why Is Pricing so Important?
Whatever your marketing mix looks like, part of it will be setting the right prices for your products. As any student doing marketing as a major in school and they’ll tell you Pricing is one of the cornerstones of marketing.
Whatever price you set, it is going to be an important factor in a lot of things: the volume of sales you get, the profits you make, and even the way your brand is perceived. In fact, the importance of pricing is so great that many manufacturers have recommended retail prices that they expect their retailers to observe. Some of them go as far as setting both a lower and an upper limit on the price.
The Relationship Between Price and the Perceived Value of a Product
Setting a certain price for your product isn’t just about making it affordable for customers. It also plays a crucial psychological role in the value of your product as valued by consumers. The way you price your services or products is a direct communication to customers, telling them how much your products and your brand are worth. A perceived value for these is instantly created in the minds of consumers.
Pricing High and Low
If you decide to price your product or service lower than the competition, then you are sending a different kind of message depending on who is listening. To a value shopper, you are saying that your product or service is a bargain when compared with the competition.
To a high-end shopper who is looking for a product or service that will make them feel like they are part of an exclusive club, you are saying that your product or service is of inferior quality. The fact that almost everyone can afford what you are selling makes it vulgar to them, which scares them away from your shop. On the other hand, such a customer is likely to rush to buy your product or pay for your service if you price it high, simply because the message they are getting is that you offer an exclusive luxury good.
You can also combine pricing with other elements to make your product or service look attractive. For example, you can price higher and make sure you offer very good customer service or add exclusive features to the product. These are forms of value addition, and they justify the high price that you are charging for your product or service.
The Question of Profit
Assuming your costs remain the same, lowering prices to increase sales also lowers the profit margin you make on each unit that you sell. On the other hand, much of the time lower prices will lead to higher sales volumes, which may make up for the lower profit margin.
Sometimes, raising the price of your product or service will lead to higher profit margins but will lower your sales volumes. If you’re lucky, or you brand yourself just the right way, the increase in price may lead consumers to perceive your product or service as having a higher value, which may lead to both an increase in profit margins and sales. Most of the time, some kind of trade-off has to be made, whether you’re lowering or raising prices. You’re choosing between higher sales volumes and higher profit margins.
A good practice is to test the elasticity of demand for your products in different regions before you alter prices. You can do this by carrying surveys or by testing the new prices on a new target market. This will tell you what price is just right for your product or service.
The Legal Aspect
The price you set for your products can have a lot of impact on how well you compete against other businesses in the industry. It can also affect how other businesses in the industry are able to compete with you.
Say you’re a particularly large player in the market and control the lion’s share of the market. In that case, your sales volumes are so large and your costs so low that you can probably survive lower profit margins, which makes it easy for you to lower prices and still stay in the game. If your competitors are significantly smaller than you, this will make it very hard for them to compete as they will be unable to make a profit.
Lowering Prices to Eliminate Competition
Such tactics will also raise the barriers to entry in that market, making startup costs increase since new companies will have to lower their prices despite having higher overheads (they do not enjoy the same economies of scale as you).
You can see here that it is quite possible for a large company to unfairly use this strategy, lowering prices to eliminate competition, only to raise the prices back when the competition is gone. This is known as predatory pricing and has legal consequences if it is viewed as a breach of antitrust laws.
Businesses today rarely go to such extremes. Instead, they used a toned down version of the strategy known as a loss leader. They sell a specific item, or specific items, at a loss in order to attract customers that will, in turn, buy other profitable items.
The Cash Flow Aspect
Sometimes you might find yourself stuck with static inventory and need to get rid of it. Inventory represents tied up money, and it isn’t much help to the cash flow of your business if it’s just sitting there. In such cases, it is usually a good idea to discount the price in order to get the inventory moving. In some cases, it even makes sense to sell it a loss. This improves your cash flow when you are low on cash and allows you to channel that cash to other parts of the business.
Better Cash Flow
With better cash flow, you will be able to buy better inventory that will make you greater profits. You can also use it on your branding and marketing, and the resulting future profits will make up for the losses incurred when selling the inventory.
If your business is seasonal, you can lower prices during the off-season to boost sales. This can help improve your cash flow until the next season kicks in.