Small Business Development Center
At Chemeketa Center for Business & Industry
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The Trouble with the Low-Cost Game

By Chemeketa SBDC

Don’t have enough customers so it’s time to lower prices, right? Well, maybe. You may be tempted to do this in your business, especially if a competitor has lowered prices. But you run the risk of lowering yourself right out of business.

Carefully consider other options; perhaps there are better ways to remain competitive. And if you need to lower prices, do so with a clear idea of where that might take your business.

• Review each step of your supply chain, from your vendors on through to your customers. Why are there not enough customers? Are you losing current customers because they’re dissatisfied? Chances are there’s more to it than your prices. Find the areas of weakness and shore them up.

• Find ways to cut costs where your competition can’t. This increases your margins and consequently your cash. If you need to cut prices as a last resort, you’ll be sitting in a better position. You may think you’ve cut costs to the bone, but take another look.

• Examine your business model. Are there strategic changes you can make instead of tinkering with pricing? Are your current offerings what the market really wants? You may have a problem with what you’re selling instead of how much you’re charging for it.

• See if you can raise prices in a complementary service or good if you need to lower them on a core good or service. A coffee shop might leave the coffee pricing alone, but slightly increase prices for pastries. This results in the same revenue per customer. On the surface it appears as if you are competitively priced, but you’re not paying the penalty for those low prices.

• Selectively lower prices for only some of your customer base, or for only a limited time as an incentive. Make sure that what you gain (in customer loyalty or in increased purchases of ancillary goods) makes up for the loss from the price reductions. Be strategic about this.

• Have a clear idea of just how low you can go, if you choose to engage in a price war. Know your limits. Remember that smaller businesses will lose this arms race much faster than larger and better capitalized businesses.

 

About Chemeketa SBDC

We provide the tools and environment for small business owners to make great decisions.

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