Whether you are a freelance writer or a business owner, pricing is a big consideration. You must price your product or service accordingly. Too high, people don’t buy. And too low, means you don’t make a profit.
For most people, lowering prices is a non-negotiable. Once they have set their prices, those are the ones that stay. The only time prices change is at the beginning of your career. When you notice that people aren’t buying. After that, they stay the same, until they increase. Established prices are rarely lowered.
And why would they be?
For most, the thought of lowering prices means less profits. It means closing business doors. Or needing a second job.
But, there are times when price reductions increase profits. It sounds counterintuitive, yet it’s true. Price reductions make you more competitive. They help clear out old inventory. Plus, they increase the amount of sales you get within a certain time period.
Lowering prices does not always increase profit. There are certain considerations needed beforehand. Keep reading to find out when price reductions may make sense. And how you go about it.
Why Should I Lower My Prices?
There are not a lot of reasons why lowering prices makes sense. But the few that exist are worth knowing about. If you know about them, you’re capable of applying them within the context of your own operations.
Competitors Lowered Their Prices
When you set your initial prices, you did so based on competing prices within your market. Well, you should have, anyway. Value-based pricing is the best strategy for initial pricing determinations.
This price stays stable. It competes within the market. And allows for competition based on value, instead of solely on price.
But, one of your competitors lowered their prices. Now, they aren’t competing with value. They are competing on the fiscal plane, instead. When this happens, it makes sense that you lower your prices, as well. Don’t lower them far below your competitor. Just lower them enough that you go back to value-based competition, not price-based.
You Have a New Product Coming Out
You’ve had the same version of your product for years. It sells well and has a solid following. However, you have an upgrade planned. Soon, you’ll roll out a new version of your product. So, what do you do with the original one?
You lower the price.
Typically, prices for old versions of a product are lower than the prices for new versions. This makes sense. Why would someone pay $600 for last year’s model, when this year’s is also $600. It plays to the psychology of appeal.
Reducing the price of the old keeps it relevant as you release the new ones. It also lets customers get used to your business at a lower price point. If they like how you operate, along with your product, there’s a higher chance of them buying the new model.
You see this strategy a lot. Though, I would say the most obvious is probably with cellphones. We buy a new one each year. Why would we bother with older models if they are the same price as the new models? You also see it in video game consoles.
You Offer Multiple Products/Services
Lowering prices across the board doesn’t always make sense. But sometimes, lowering them for certain products does.
When you have multiple products, consider reducing your prices for some segments. This keeps you competitive within the market. Without messing up your pricing strategies or profits.
Airlines employed this method when a new competitor arrived on the scene. That new competitor only sold coach-class tickets. To remain competitive, the other airlines lowered the price of their coach tickets. However, they still had a first-class section. Those prices stayed the same.
Lowering prices in some segments grants you competition power across a wider range of the market. You are competing now for customers at varying price-points, not only one. It gives you more flexibility and improves your chances of success.
How Do I Lower My Prices?
If lowering your prices makes sense for you, go about the process strategically. Don’t jump in and reduce your prices without considering the how.
Run the Numbers
Whatever reason you have for lowering prices, don’t rush into the move hastily.
Put thought into your overhead for each product. What does it cost you to make? How much is your marketing? What value does your product/service deliver?
Don’t lower your prices to the point of devaluing your product. The vast majority of the time, there is no point in lowering prices so much that you are no longer profiting on sales. This only makes sense during holiday seasons, if you want a special sale. Or, in clearance events where your goal is clearing space.
The point is, be careful about lowering prices. Think about all the costs associated, and do not reduce prices beyond that.
Determine the Timeline
Price reductions are not always permanent. Nor do they always occur in a single move. Sometimes, lowering prices incrementally makes the most sense. It begins with a modest three percent reduction. In six months, that reduction grows to a five percent one. And eventually a 10 percent one.
These incremental price reductions are often tied with lowering prices for old products as new ones are released. Each product has a lifespan. Consider that lifespan as you gauge an incremental price decrease.
Sale price reductions are also temporary. Sometimes, they only last for a month or two, depending on your sale. Though, they can last for longer.
For competition purposes, a single price reduction is often best. This reduction occurs immediately and typically remains permanent. Over time, you’ll increase your prices from that point instead of reverting to the original cost.
Focus on the Features, Not the Price
Outside of a temporary price reduction (such as a sale), focus on the features your product offers. This is better than focusing on the price reduction. Obviously, you announce the new price. You don’t just change it suddenly online or in store. But, you don’t focus your advertising or marketing on that price change.
If you focus on the price change, customers feel they are getting less. They will see that the price is lower. And they’ll wonder if the product changed and they aren’t getting the same value as before. Focusing on the features eliminates this. It demonstrates what the product offers. It shows how it benefits customers. This eliminates concerns about getting less value.
Alongside that, you can discuss the price. But wrap it up within the areas of accessibility and affordability. Don’t skimp on discussing features. Show customers how the same features are now more accessible thanks to the new price.
Other Considerations Before Lowering Prices
Perhaps your company meets the above-mentioned reasons for lowering your prices. However, that doesn’t mean price reduction makes the most sense for you. Here are a couple other considerations to keep in mind:
Your Elasticity
The elasticity aids with determining price reductions. With pricing changes, you expect that your demand changes. Take this proposed change in demand and divide it by the planned price change. This is how you find elasticity.
Let’s say you are selling a product for $10. Manufacturing it and shipping it costs you $1. That’s a good 90 percent gross margin.
You plan on decreasing the cost of the product to $9. Now, your gross margin lowers. You’re only looking at a margin of around 88 percent. Not a big difference, despite the price change amounting to a 10 percent decrease.
When you divide the demand by the price decrease, you get an elasticity of 3. This means that you can expect a 30 percent increase in sales following your price decrease. This actually translates to more profit for you.
If your elasticity is less than one, you won’t see an increase in revenue after you decrease your price. But, any elasticity number greater than one will grant you a revenue increase. Make sure you consider this before you decide on whether lowering prices makes sense or not.
Increasing Your Value
While the above reasons for decreasing prices are sensical, there are times when it still doesn’t make sense. In certain situations, you can find solutions without decreasing your prices.
How?
Simple. By increasing your value. Instead of changing the price of your products, increase their value. Add more features to them. Increase their size. Create more benefits for customers. Or bundle a high-selling product with a low-selling one.
These entice customers because it gives them more value for their money. Although it isn’t always applicable, it’s worth considering before you decide on a price decrease
Lowering Prices is not Something to Fear, It’s a Strategy
Customers are more resilient than you may think. Explain in your marketing that customers aren’t losing any value, despite the lowering price. Don’t gloss over things and expect that they all go smoothly. Being honest and upfront goes a long way in the world of business ownership.
This is something that I dealt with. I didn’t need a marketing or advertising plan, because it was my freelance writing. And I happened to be between clients at the time. But I noticed that my prices had out-paced my competition (probably why I wasn’t getting clients).
Lowering my prices felt like I was devaluing myself. It seemed like I was admitting that my work was not good enough. But that wasn’t the case. My prices weren’t competitive enough. It had no bearing on my quality of work.
Don’t be terrified of lowering your prices. Don’t avoid it at all costs.
Sometimes, moving backwards is what helps you move forward. It’s the same with prices. Lowering prices can increase your profits. And push you more toward success.