price

Make It Your Business: Think Twice Before Cutting Prices

Vince DiCecco is a business training and development consultant and has been involved in sales, marketing and training since 1981. Contact him via e-mail at vince@ypbt.com or visit www.ypbt.com.

What do the following once brand-name retailers have in common? Sports Authority, Toys “R” Us, Circuit City, Sharper Image, HH Gregg, A&P Supermarkets, and Howard Johnson’s Restaurants. If you guessed they all went bankrupt and are no longer in business after once dominating their respective market segments, you are correct. So, what went wrong? A good portion of the blame for each of these companies can be placed on their decision to try to compete by offering bargain-basement prices on some of its best-selling items and trying to build customer relationships through across-the-board price cutting.

Were they forced to offer matching prices for comparable products as their chief competitors due to fear of losing market share? Hardly. They each rose to the top of their industries with quality products, friendly and reliable service, warehouses full of available inventory and/or timely delivery, and hundreds of convenient locations. Yet, in the face of various adverse market conditions, they made the conscious decision to compete primarily on low prices.

Now, consider this company backgrounder, dated April 2004, taken from the once-powerful computer maker Gateway Inc.:

"Gateway, since its earliest days, has pioneered numerous industry trends and practices. It was the first PC company to offer systems with color monitors as the standard, the first to offer a standard three-year warranty and the first to commercially explore convergence of the PC and television. It was one of the nation's early "bricks and clicks" retailers, and it was among the first direct retailers to sell its own branded consumer electronics ... such as thin plasma TVs, digital cameras, camcorders and other networking products."

It was these differences that set Gateway apart from the others and led them to receive nearly 130 industry awards and honors in 2004. So, why did Gateway head down the road to extinction instead of distinction? It was because it thought it had to cut prices to be competitive.

 

Capitalize on core competencies
Gateway’s stated corporate vision was to "offer products directly to customers, providing them with the best value for money and delivering unparalleled service and support." Nowhere in its vision statement appeared the word "discounter" because it didn’t become successful on the fact that it had the cheapest products. In fact, Gateway had built its reputation on innovation and ground-breaking customer care. That was the company’s core competency, not as a place to get a dirt-cheap computer. All of which would suggest a flaw in its decision to follow its competitors into the low-price ring.

What does this mean to a sign and digital graphics shop? Basically, it should serve as a wake-up call. If you take a student’s view of what immediately precedes a company’s filing for bankruptcy or becoming a takeover target, you will find that three things occur most frequently:

  • prices are slashed to stimulate sales,
  • gross margins decline sharply, and
  • sales revenues approach record levels.

Let me again ask you an important question: "Which would you rather be, profitable or busy?" Brisk sales do not guarantee fiscal success. Being skilled at selling at prices higher than your competitors does. I fully appreciate that the cut-throat mentality in today’s economy makes it difficult to hold your ground on prices. But for the sake of your own survival, you must.

When I’ve asked business owners in our industry to describe what their company is best known for, I’ve received answers such as “unmatched quality,” “one-of-a-kind design,” “attentive customer service” and “dependable delivery.” You can argue that those four distinctions translate into trustworthiness, likeability and convenience in the eyes of the customer.

Does that mean that your company must be great in every aspect throughout the selling process? Not by a long shot. It just means that your company should consistently distinguish itself from the competition in the arena that means the most to your targeted clients.

If you aren’t sure which of your value propositions is most appealing to your customer base, take time to conduct your own market research. For a specific period of time—say, a month or so—attach a one-question survey to every packing slip or invoice and encourage your customers to respond:

What was the MOST compelling reason you chose to do business with us today? (please select ONLY ONE answer): Was it…

  1. Our low price
  2. Our superior quality
  3. Our unique and creative design work
  4. The way you were received and treated before and while placing your order
  5. Our outstanding after-the-purchase support and service
  6. Our on-time delivery / installation, as promised
  7. Our convenient location and hours of operation
  8. In response to a promotion or special offer
  9. The easygoing and enjoyable experience of shopping with us.

After several dozen responses to that one question, you should see a pattern emerge. Hopefully, you will receive the least number of votes for low price and special offers. From the other choices, the overwhelming response will reveal your business’s core competency in the customer's eye.

Once identified, invest even further in becoming world-class in that area. Dare to set the standard of what you do best for the rest of the industry. The byproduct of conducting such a market study will lead to a renewed vigor for your business. As a result, the temptation to slash prices to stimulate sales should subside.

A bit of history
In the late 1960s, simple signage grew in popularity. Even with double-digit inflation, the sign phenomenon continued to roar through the '70s and '80s. Do you recall the Five Man Electric Band with its 1971 hit "Signs"?

Sign, sign, everywhere a sign

Blocking out the scenery, breaking my mind

Do this, don’t do that

Can’t you read the signs?

In those years, most signs were made of wood, steel, neon glass and paint. Most, if not all, were created by hand—one at a time. Turnaround times were long, but the end result was a work of art that would seemingly last a lifetime. In the late 1980s, technological advances challenged many sign makers’ livelihoods. Computers and automation systems exploded onto the scene in the form of digital plotters, vinyl cutters and large- and grand-format printers. Banners and posters didn’t have to last forever and their quality did not need to be the greatest. They just had to serve their purpose through the course of the event and then be discarded.

What scared the sign-making veteran was not the instant turnaround time or the marginal quality of the signs of the day. It was the price. Technology was spitting out hamburgers instead of the filet mignon of old, and the seasoned, gourmet sign maker panicked. People in the graphics industry had to make some tough decisions. Should I embrace the technology revolution and learn a new way to produce graphics? Should I stick to what I know and reduce my prices to stem the customer exodus? Will it even be possible to make a decent profit in this business?

Err on the high side
The one mistake I believe today’s new-fangled sign makers make is to launch new products at lower-than-necessary prices. When any business introduces a new product, it runs the risk of pricing it too high, too low or just right in order to balance supply and demand. More times than not, when the price of a new item is "just right," it’s not street smarts—it's dumb luck.

If you have no clue how to price a new offering, err on the high side. You will always have the option of reducing the price if sales are short of expectations. However, if you price it too low initially—in hopes of getting off to a fast start and/or crushing the competition—you will have a bear of a time trying to raise the price when the product was so recently introduced. I have to chuckle when "the low introductory price" of a new product becomes "the regular price" shortly thereafter. Over the lifespan of most products, prices tend to deteriorate rather than escalate.

Cut prices only with sound reasoning
There are precious few reasons to consider cutting the selling price of a product. Here they are, as I see them:

  • If you can cut the cost of producing the product without sacrificing quality, gain a competitive edge and pass some of the savings on to the customer, reducing the price of that product is a wise decision.
  • If the cost of maintaining sluggish inventory—that is, finished product that sits on your shelf far longer than normal—outweighs its value; then having a liquidation or clearance sale on those items would make smart business sense.
  • If cutting the sales price of one item to the bare minimum necessary to cover costs would stimulate the sale of another, very profitable product—that is, a loss-leader promotion—that strategy may have some merit.

But an effort to steal a sale away from a competitor or to appease an insistent price buyer in hopes he won’t return are not good reasons to drop your price. In fact, they create more problems for you than they solve. In the first case, when all of your good customers catch wind of the sweet deal you gave someone else—and they will—you will be forced to offer that price to them for quite a while. In the latter situation, price buyers are relentless. They simply do not go away. My advice is run, don’t walk, away from price buyers. Good luck.