Many entrepreneurs in the time of recession think that best way to increase selling and keep their existing customers is to lower their prices. And they do that! However, there are many hidden negative effect for the business. You can see only the profit as one of the negative effect, but not the hidden effects to your business. Let’s see one example:
| Selling Price | $100.00 | $90.00 |
| Costs | $80.00 | $80.00 |
| Items Sold | 50 | 50 |
| Total Income | $5,000.00 | $4,500.00 |
| Profit | $1,000.00 | $500.00 |
In this table is something that you can easily see when you make lowering of the prices. As you can see with 10% lowering of the prices your profit will decrease with 50%. This is big negative effect on your business. But, you probably think that with lowering prices you will sell more products. Let’s see this comparison in the example below:
| Selling Price | $100.00 | $90.00 | $90.00 |
| Costs | $80.00 | $80.00 | $80.00 |
| Items Sold | 50 | 60 | 100 |
| Total Income | $5,000.00 | $5,400.00 | $9,000.00 |
| Profit | $1,000.00 | $600.00 | $1,000.00 |
As you can see from this example if you sold 60 pieces you will have $600.00 profit, and you must sell 100 pieces to have profit as before lowering prices of $1,000.00. Profit of $1,000.00 needs 100% increasing of the selling when you lower the price for only 10%. Do you think that with 10% lower prices you can receive improvement of selling of 100%? I think that this is impossible. These are visible effects when you lower the prices.
Let’s talking about hidden effects of lowering prices. When you lower your price you will decrease your reputation. This means that your customers will think that you have lowered prices because of the low quality that they will receive. Another possible thinking of your long-term customers can be that you charge them too high in the past period of making business with you. Because of that, there is a big possibility that when you lowering price to lose some of your current customers. Another thing that becomes a part of hidden effect is your competition that will also lower their prices. Because of that you cannot expect too many new customers because the prices will be the same.
You can see that two types of effects from lowering price is not so good for the entrepreneur. With the visible effects, you must increase for 100% selling to make the same profit and with hidden effect you can lose some proportion of your current customers. That two things are opposite one with another. Because of that lowering prices is bad strategy in the period of recession.
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