Main Idea
When is the last time you bought something on sale? Do you get jazzed when you get a great deal? Can home builders generate sales by reducing prices? Can you predict the next great big sale at Macy’s? In this economic time, many retailers are offering deals and discounts to draw in customers. This can have a positive effect on the wallets of consumers, but how does it affect the company? How many additional customers will they need to make up the difference?
Expansion of Idea
Pricing is a critical piece of a business. Most business people do not fully realize full relationship between price cuts and survivability. For example, if your company has a margin of 30% and you decide to reduce your prices by just 10%, you will have to increase your sales volume by 50%. Assuming you are able to generate that 50%, you may then need to consider hiring more staff to accommodate the increase in activity. This can be a death spiral.
What most people do not think about is that sometime it is better to increase prices. If you are providing superior customer service, some customers will not change. The key issue is how many you will lose. If you look at the example of a margin of 30% and you increase prices by 10%, you can afford to lose 25% of the customers before it adversely affects your profitability. Before jumping the gun on slashing prices, do your research and determine how much business you will have to pick up to make up for the loss of profits. Then make a wise choice on adjusting your prices.
Suggested Areas to Start
Know your gross margin.
Communicate that margin to your team.
Evaluate the effects of price cuts or increases.
Brainstorm how to avoid price cuts.