Every business owner has been faced with a customer carrying a competitor’s ad or invoice with a lower price. Your immediate reaction is to match the price.
When you are trying to increase gross profit, the fastest route to putting more cash in your bank account, price matching is a profit-killing error.
I have included an Excel spreadsheet to help you determine how big of a mistake you would be making if you price matched. You use it to determine how much your sales must increase just to achieve the same level of profit without the discount. You do this by locating your profit margin across the top and your planned discount percentage down the side.
Allow me to illustrate. Assume that I have a 40% profit margin (sales minus cost of goods sold) and I am going to discount my product by 10%. The intersection of these two numbers shows that I must increase sales by 33% just to break even. And this assumes that a 33% increase in sales of this product won’t result in any increases in operating expenses—a rather unlikely occurrence.
A better approach is to follow Dan Kennedy’s advice. “See what your competitors are doing and do the opposite.” Raise prices instead.
Every time I say this to my clients, I hear some variation of the following: “I can’t do that! I will lose my shirt!” I too have been (and still sometimes am) guilty of this thinking. Will you lose customers if you raise prices? Of course you will lose customers, but will it hurt you?
The second table attached shows the amount that your sales would need to decline following a price increase before your gross profit is reduced below your current level. At a 40% margin and a 10% increase in price, you could lose 20% of your sales before you experienced a drop in profit. You could literally lose one out of every five customers and still be even!
Knowing this will still be a problem for you if are a business owner who thinks price is the only factor influencing a buyer’s purchases. That type of business owner will clearly reject raising prices. This means that they also reject the concept of value selling. Their standard response is, “That may work for some businesses, but it sure won’t work for me!”
In my experience, there is no business that doesn’t have a way of commanding a premium price on its products or services. They do this by marketing their products and services in such a way that the customer perceives an added value over the lower-cost items offered by the competition. Of course, this is the catch—you must do the hard work of determining what this added value is and communicating it to your customers
If all of your marketing and advertising is based on price, you should be very afraid. You only have a business until a competitor comes along who is willing to sell to your customer at a lower price.
The only way to get out of this pricing trap is to focus your marketing and advertising on other features and benefits. Such as? That will be different for every business, but some common ones are better quality, better service, longer warranties, a comprehensive warranty, more convenient location, 24-hour access, etc. You may already offer all or some of these. But if you don’t focus your advertising and marketing on it, how will the prospects know?
Your job as a business owner (who by definition is a marketer) is to design and market your products and services with a high perceived value and deliver them with service that wows the customer. Price is only important if all other things are equal.
Yes, there are customers who only care about price. Let your competitors compete with Amazon, Walmart, Sam’s Club, Costco, and an ever-growing list of internet sites for those price-is-everything customers. If you want to grow a profitable business, you must build your business on those customers who are willing and able to pay for value.
The key is to first create value and then educate your customers so that they are aware of this higher value they will receive from buying from you, rather than going with the low-cost alternative.