Why Lowering Prices is a Bad Strategy For Your Small Business

Many entrepreneurs in the time of recession think that the best way to increase sales and keep their existing customers is to start lowering their prices. Additionally, many of them are lowering prices to eliminate competition, and to increase revenue and sales. And in many cases, they do that!

However, there are many hidden and visible negative effects on the business when you use such a pricing strategy.

Let’s start with the visible negative effects of lowering prices.

Visible Negative Effects of Lowering Prices to Succeed

In many cases, you can see only the profit as one negative effect. But, this is not the hidden effect on your business. Let’s see one example:

Sales Price$100.00$90.00
Costs$80.00$80.00
Items Sold5050
Total Income$5,000.00$4,500.00
Profit$1,000.00$500.00

From this table, you can easily see what happen when you are lowering your prices. You sell your product for $100.00 and cut your price to be $90.00. As you can see if you cut your price by 10% of your current prices, your profit will decrease by 50%. This is a big negative effect on your business. But, you probably think that by lowering prices you will sell more products. Let’s see this comparison in the example below:

Sales Price$100.00$90.00$90.00
Costs$80.00$80.00$80.00
Items Sold5060100
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 of your product or service, you will have $600.00 profit. If you want to have the same profitability level from before price cutting, you must sell 100 pieces.

So, the profit of $1,000.00 will require a 100% increase in the sales when you cut the price of only 10%.  Do you think that with 10% lower prices you can succeed to improve the sales by 100%? I believe that this is impossible. These are visible effects when you lower the prices.

Hidden Negative Effects of Lowering Prices to Succeed

Let’s talk something about hidden effects of lowering prices.

When you cut your price, you will immediately decrease your reputation as a business with high-quality products and services. This means that your customers will think that you have lowered your prices because of the low quality that they will get from you.

Another possible thinking of your long-term customers can be that you have charged them too much in the past period of doing business with you. Because of that, there is a significant possibility that when you are lowering prices to lose some of your current customers.

Another thing that becomes a part of the hidden effect is your competition that will also lower their prices. Because of that, you cannot expect many new customers because the prices will still be the same.

You can see that two types of effects from lowering prices are not so good for you as an entrepreneur. With the visible results, you must increase your sales by 100% if you want to make the same profit. With the hidden effects, you can lose some proportion of your current customers. That two things are opposite one with another. Because of that lowering prices is a bad strategy in the period of recession.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan