Understanding Pricing: The Danger of Offering Low Prices

After browsing the internet reading up on new marketing ideas, I have a question I think all new business owners should consider – is offering low prices really such a good idea for your business?

Reading through a list of marketing ideas I came across was this long-standing piece of advice ‘offer very low rates to raise your profile and attract customers’. To be honest, I was a little dismayed to see this written without any further explanation or caveats.

 

The fact is, many new businesses people do try to start out undercutting the competition, and on the surface it makes sense. Quickly gain business, establish yourself, bring in much needed cash early on, and grow. Long term though, I think this strategy can have quite a few drawbacks. I’m going to run through them below.

 

Before I do this, I do need to point out that this information is obviously dependant on your market. If you’re setting up a discount shop in a high traffic location, it may be exactly the right strategy for you. If you’re selling products that are widely available elsewhere competitive pricing is important (but still not the only reason people may buy from you). I am thinking here of the many businesses set up either to offer their services, whether that’s accountants, electricians and web-designers, or those selling products that are maybe a little less widely available.

 

Firstly, what are the reasons new businesses often start out by offering lower prices than their competitors?

 

They genuinely believe that they can undercut their competitors, attract customers and still make a healthy profit.

They don’t fully understand the variety of ways they can market their business -undercutting their competitors is just another way of bringing people in.

Related to this point, the plan may be to attract custom then raise prices to a more realistic level after becoming established.

The new business person lacks self confidence in themselves, or their business.

The business needs cash quickly.

They don’t truly understand their break even point (yes, this happens all too often)

People new to the business world don’t value their own time and professionalism.

 

Whilst the first is a legitimate reason for low pricing, you can see that the others are not; they are built on flawed thinking. Unfortunately, I was able to write this list of the top off my head in seconds as I encounter these reasons all too often. Do you recognise any of them in your pricing strategy?

 

Now, you may be asking what the problem is. As long as you can undercut your competitors and still make a profit why worry about low pricing? The truth is, low prices can damage your business in many ways.

 

Firstly, don’t assume you can build a client base and raise prices later on. By offering low prices at the start, you are setting an expectation. Offer something then take it away and you upset people. You’ll have spent time and money attracting people (who in this case value low price above other considerations) only to now drive them away whilst you look for those customers who value other factors above the cheapest price. Not only will you be starting over again, in fact, you’ve already disadvantaged yourself here. Those higher paying customers now see you as a cut-price operator, not necessarily a quality-led operator. In many people’s minds low price equals low quality. Far better to start off offering quality at a fair price and attract the right kind of customers from the start.

 

You’re also leaving your company vulnerable to new competitors. Spend time building a reputation for quality, speed, service etc and it’s harder for a new business to take your customers. You’re building a loyal customer base here, who shop with you because of how your business works, and how you treat them. If price is the reason people come to you, you’ve always got to watch out for that new business undercutting you. There’s far less customer loyalty here, and they’re often ready to move to a cheaper competitor.

 

Finally, how do offering low prices affect your long term plan? Does it leave you with money to invest in the business, or just provide you with enough to live off month to month? Do you have a surplus to invest in marketing, customer relations or are you just hoping that the low prices keep drawing people in? What about your time? Do you need to work 60 hours a week just to earn a living? If so, how are you going to find the time to sit back and plan the next six months marketing, research new products, or think of ways to outflank your competitors?

 

If you were thinking of simply undercutting your competitors, I hope you can now put forward together a solid reason for doing this, and at least be aware of the negative effects that can result. Maybe you see that some of the reasoning was flawed, and that there are other, better ways of establishing a business that have more potential for long term success.

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