Pricing is one of the most fundamental strategies for doing business. There are a few times when cutting your prices seems like a brilliant idea. When you have to clear out old stock, cutting price can make business sense.
In the contemporary marketplace where competition has become cut throat, however, many vendors may decide to cut prices for all the wrong reasons. In the end, they end up cutting their own throats!
Here are a few reasons why cutting prices is a bad idea.
1. Perceived value
Most people associate low prices with low quality. This implies that your customer may be misled by your low prices to think that you have compromised on quality. Therefore, although you might be selling the exact same quality, expect your customer base to reduce substantially.
According to Steve Posavac, low prices can scare off customers especially for new startups since it is interpreted to mean low quality. Recently, Ryanair was voted the airline with the worst customer service. Many experts believe that this was due to its low pricing policy and not necessarily because of their service. In fact, Ryanair is one of the giants in the British aviation industry.
2. Reduces cash flow
You might decide to lower your prices to increase sales. One thing you might not envision is that it might take time before the sales actually increase. Meanwhile, business has to keep running.
You might be forced to cut operation costs in order to meet the reduced cash flow. This might even force you to stop the free office coffee for you employees or stop the employee self-development program. You know what damage that does to the morale of your employees.
This can easily translate to under-performance, poorer customer services, and lower quality products. Just like that, you live up to the expectations of your customers on the quality of your products or service.
3. Can lead to law suits
Believe it or not, cutting pricing can lead to expensive lawsuits you were not expecting. If you competitors feel that you are reducing your prices just to have undue advantage over them, they’re likely to take you to court.
If they can prove it, you will definitely be out of business! Imagine what that would do to your brand image. What about the money you will spend on the court process? In the end, instead of increasing your sales, you will have created more costs for yourself.
Price cutting is not always that magical formula for increasing sales as most business executives think. It can in fact lead you to an early business grave. Take your time and analyze every possibility before cutting your prices!