Should we reduce the price?
The question sounds like a marketing decision. Walk through it the way a business owner has to, and it turns out to be a question about who your customer is and whether you know your own numbers.
This is one of the questions business students sit with in a GullyFuture decision lab, with incomplete information and a practitioner waiting to hear what they would do. It is a good one because the instinctive answer — sales are slow, cut the price — is the one most owners regret.
Here is the way a practitioner works through it.
What you should come away with
- A price cut is permanent in the customer's mind even when you call it temporary
- Know your margin before you touch the price; a ten percent cut can mean a third of your profit
- Slow sales are a symptom with several causes, and price is only one
- The customers a lower price attracts are the ones who leave for a lower one
- Sometimes the right move is to raise it, and lose the customers who were costing you money
The first thing an experienced owner asks is not whether to cut the price. It is what a cut would actually do to the money. Students tend to think of a ten percent discount as ten percent less revenue. It is not. If the product costs sixty to make and sells for a hundred, the margin is forty. Cut the price to ninety and the margin is thirty — a quarter of the profit gone, to sell the same thing. Now the question is whether the lower price will bring in enough extra volume to cover that, and the honest answer is usually that nobody knows.
The second question is why sales are slow, because a price cut is a treatment and you have not diagnosed anything yet. Is it that customers are looking and not buying, which might be price? Or is it that they are not looking at all, which is a marketing problem a discount cannot fix? Is it seasonal? Has a competitor arrived? Has the product stopped fitting what customers want? Each of these has a different answer, and only one of them is the price.
The third is the one owners learn the hard way: customers remember the lower number. A temporary discount trains people to wait for the next one. A permanent cut makes the original price look like it was always too high. Either way, you have moved where the customer thinks the product belongs, and moving it back is far harder than moving it down.
The fourth is about which customers a lower price finds. It finds the price-sensitive ones — the ones who chose you because you were cheapest and will leave the moment somebody is cheaper. Owners describe building a customer base on discounts and then discovering they had built nothing, because none of it stayed. The customers who pay full price are the ones who chose you for a reason, and they are the ones who are still there in year three.
The fifth possibility is the one students almost never propose, and practitioners raise it every time: raise the price. Not always. But often enough. A business with more work than it can handle, or with a small number of customers consuming most of its effort, or with a product that costs more to deliver than anyone realised, is frequently underpriced. Raising the price loses the customers who were least profitable and keeps the ones who valued it, and the business is smaller in revenue and larger in what it keeps.
So the answer a practitioner gives to 'should we reduce the price' is usually another set of questions. What is the margin? Why are sales slow — really? Who would the new price attract, and would they stay? What happens to the customers we have? And is the problem actually that the price is too low?
Only after those does the decision get made, and it is made knowing what it costs. Which is the whole point of sitting in the chair.