Pricing is a strong pillar of your marketing strategy. If you are offering a service, correct pricing can catapult your business to new heights in a short time period. On the other hand, high or low pricing can have adverse impacts on your sales and your image. Many times, service providers have to reduce their prices in keeping with the reduced prices of the competitors. At other times, a price reduction becomes necessary to beat a sluggish market and to create demand for your services. What are the impacts, both short term as well as long term, on your business because of this price reduction? Let us find out.
Price cutting, whether it is initiated in response to price reduction adopted by competitors or to shake up demand in a sluggish market can have both short term and long term effect on your business.
Short term effects of price reduction on your business
If you are worried about dropping sales figures and no amount of advertising has been effective, price reduction can be a wonderful ploy to catch the attention of your customers. Maybe there are lots of customers desirous of availing your service but they haven’t yet become actual customers. Reduced prices become an incentive for them to pull the trigger and order your services.
In such a scenario, you start receiving orders from customers who have been sitting on the fence. You also get orders from those customers who have previous availed your services at a higher price. This will increase your sales for the time being even though your profits will take a beating. Lowering your prices is a good ploy if you are struggling with cash flow in your business and need money to pay off necessary expenses.
Timing of price reduction is important
You cannot reduce prices of your services at any time to suit your business interests. It is necessary to bide your time and go for price lowering at the right time to catch the attention of your potential customers. For example, many businesses lower their prices during fall season when the sales are sluggish and holiday season is too far away. Lower prices serve as an incentive for the buyers who see their profit in giving order to your business. There is no use lowering prices when the business is doing well and the sales figures are also good. Also, lowering of price because of poor sales in the peak season is like pressing the panic button. In these times, price lowering does not bring in desired results for your business.
Long term effects of price lowering on your business
Most of the long term effects of price lowering are detrimental for a business unless it is perceived as belonging to premium segment. The biggest disadvantage of course lies in the risk of damaging the reputation of your business. There is a high percentage of customers who believe that you have probably lowered the quality of service to offer low prices. If you have customers availing your service for a long time, they might become upset when you lower your price. They may think that you have cheated them with high prices earlier. Such customers, instead of availing your services in increased frequency, actually run away and also ask their friends and relatives to not avail your service.
You can counter these negative perceptions by providing two or more services while keeping the prices same. This way the customers benefit as they pay same amount while they get more value for their money.
When competitor also lowers price at the same time
If you have several competitors and they start to follow suit when you lower your prices, your exercise may fail to have any impact on your customers. Your customers will see no benefit or profit coming their way form you as they see price lowering taking place with other service providers as well. In fact, you may see your sales dropping further even when you have reduced prices to further put a dent on profits of your business. Also, in times of recession, lowering your prices does not have much impact on your sales as people are generally not interested in spending money on non-essential services.
Gains are more in short term
Lowering of prices is most effective in case of standardized services whose prices are well known to customers. They are surprised and feel attracted to your business when they find that you have lowered prices of your services that they have a perceived value in their mind. You can benefit with increased sales for such services with lowered prices in the short run. However, keeping prices low for a long period will eat into your profits and you will not be able to sustain your business.