Is Low Pricing Losing You Money

When you first launched your business you were probably nervous about price setting and didn't want to scare potential customers away by pricing too highly. It was probably easier (and you felt safer) to price low – your thinking being that this would attract new customers and steal customers away from competitors.

Well, this may have seemed like a good strategy in the early days but over time, have you made only nominal increases to your prices without considering what this is doing to your bottom line?

The price you charge for your product or service is one of the most important business decisions you make. Setting a price that is too low will limit your business growth and could cause serious problems for your sales and cash flow. In extreme cases, a business could actually lose money with each new sale.

At the end of the day, running a business is about charging the money you deserve for the value you or your products bring to customers. Low prices send the message that your services or products are worth less than others on the market. If you think about it, what quality do you expect from a £4.99 bottle of wine versus a £20 one?

Nothing has a bigger impact on your business’s sales, bottom line and future growth than your pricing strategy. According to analyst firm McKinsey, prices that are too low are a bigger problem for businesses than prices that are too high. Continuing with low prices could also become unsustainable.

What are the signs that you are pricing too low?

Nick Cronin from ExpertBids.com says:

Quotation Mark 1.png As bad as it sounds, if no one is complaining about your cost, you may want to raise it.

Quotation Mark 2.png

Lawrence Steinmetz the author of the book 'How to sell at margins higher than your competitors' has said: "If you suddenly start getting lots of new customers, and you haven't been out there beating the bushes, advertising, promoting, marketing and prospecting - they're just... swarming in through the door - your prices are too low".

Have you noticed that your customers are buying more than they need? Well, pause for thought, it might just be that they are "stockpiling" because they are afraid they won't get such a good deal in the future!

Limited supply with increase demand means your prices are too low and should be increased. Your customers will accept that in the face of a limited supply higher prices are inevitable.

What does a low pricing strategy say about you?

Low prices might be damaging to your credibility. Prior to the internet, being the everyday low price leader in your geographic region was an advantage. With the internet revolution came the ability for your potential customers to check your pricing against hundreds or thousands of online retailers.

According to the Knowledge Emory, if your so-called everyday low prices are not comparable to those found on the internet you stand to lose a great deal of credibility.

What if you are trading on the premise that yours are the lowest prices? This could mean that you have insufficient margin to offer occasional promotional discounts.

When you have conditioned your customers to expect every day low prices, offering them further discounts could seem contradictory and cause them to question whether or not you really have the lowest prices.

If you are using competition-based pricing this strategy relies heavily on the pricing habits of your competition; it does not take into account product cost, your profit margin or product demand.

In some cases, you may be forced to sell your products at a loss to remain competitive. Always being the lowest-priced supplier sometimes creates the perception that your product quality is lower than that of the competition.

A low price strategy reduces your profit margin and forces you to operate on a low budget. If you cannot afford to hire the number of sales people needed to maintain a high level of customer service and an increase in sales totals then low pricing may not be enough to maintain repeat business.

Price Testing

Once you have decided that your prices are too low you will have to engage in price testing to find the optimum price. Unfortunately there is no "quick fix" solution; it will involve testing, research and confidence.

Derek Shanahan from SuperRewards says "The best way to test increasing your product cost is to increase your product cost and test your results against your previous price point. That could mean simple webpage A/B testing, or going into a new market with a new price and seeing the result."

Rishi Shah from Digioh says: "The best way to figure out if the customer will pay more for your product is to simply raise your price and see their reaction. If they say yes, you just made more money.

If they say no, tell them you will give them a special discount. If you're a web company, simply set up a landing page with higher prices. If your conversion rate doesn't go down, then keep upping the price!"

How to Raise Your Prices

It may have been bothering you for a while that you need to raise prices but are not sure of the best way to go about it. Here are a few tips:

Sell based on value, not just price (see comments on Waitrose below)

Naturally you want to be competitive but do you really need to be the lowest price provider?

If you offer more value (e.g. better service, higher quality, more customisation, etc.) then don't be afraid to charge for that extra value.The more you are able to provide the solutions that other companies can't, the greater your ability to price in relationship to the true value of your product or service.

You currently charge the least amount that you can for fear that customers won’t pay more. Then, once those low rates are established, you worry what will happen when you try to raise them.

If you have fallen into this trap, then you know that this approach can result in barely enough revenue to get by, and customers who don’t particularly value your products. By competing on performance instead of purely price, you can frame the customer’s decision in terms of your company’s strengths.

Think about the lifetime value and benefits that your product or service offers and price accordingly.

Create tiered packages

If you’re worried about what kind of resistance you might face by raising your prices, you can smooth the waters by creating tiered "packages" that appeal to a broader range of customers. That’s what Apple did by introducing the iPhone 5c and iPhone 5s models.

If your current customers want to keep their existing prices you need to communicate that they won’t enjoy the same level of support, response time, or other benefits as those customers opting for your premium packages.

You’ll be surprised at just how many current customers will be more than willing to move up a tier in order to benefit from better service and enhanced value.

To hell with it!

Sometimes the best way to determine if your customers are willing to pay more is to simply raise your prices and see what happens. If you’re selling products or have an online business, set up a landing page with higher prices.

If your conversion rate doesn’t go down, congratulations! If you are so inclined you might continue to raise prices even higher.

Case Study

Supermarkets are in constant pricing competition with "Price Promises", "Price Matching" and "Lower Prices". These prices are harming their businesses, and the "big four" (Tesco, Sainsburys, Asda, and Morrisons) have all reported slow downs and profit warnings.

Waitrose on the other hand, whose boss has been quoted as saying "our strategy is to do the opposite of what everyone else is doing" has seen its market share grow. Waitrose focuses on promotions and providing value to members, rather than lowering its prices.

The supermarket is making a major push into fresh food-on-the-go in particular following the success of its move to offer free tea and coffee to members of myWaitrose, and the "welcome desk" concept, which is already in over a hundred locations and aims to emulate the type of service you would find in a hotel.

Customers may want prices which are simple, consistent and low, but the Waitrose example has shown they also want value.

Has Low Pricing Lost You Money?

Once you have become established, the only way to assess the impact of price changes is to test, test and test again. You can support price rises with ensuring your value is clearly communicated to your customer base. Don’t worry if you lose a sale or two.

By raising your prices, you end up working with the kind of customers who understand the value of investing in higher-priced, higher-value products and services. In short, your pricing strategy can help you attract the right kind of customers to build a sustainable business for the long haul.

While some business owners fear increasing prices for loyal, long-term customers, the truth is that customers fear "switching costs" – and the hassle involved, more than a price hike. Often the switching cost is higher than your increase in prices, so they won't leave you just for making these price changes.

And another thing, don’t apologise for the pricing change – you owe it to your peace of mind and future business success.

Related Posts

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How to Execute Value-Based Pricing

Forget Cost-Plus Pricing – Sell Value Instead