Cutting prices for products or services may seem a tempting proposition, but it comes with significant consequences.
One of the biggest mistakes I see entrepreneurs make is relying on sales or otherwise discounting their product or services. While this may be helpful in getting rid of old inventory or giving a business a quick revenue bump, I’ve never found it to be a successful strategy in the long run unless it’s done properly. Why?
1. Lower price is perceived as less value
Most of us believe that you get what you pay for; whether it’s a product or service, we unconsciously associate higher price with higher quality. When I was working as a realtor, it was fairly common for agents to discount their commissions. I rarelydid. I worked very hard to become good at my profession, was extremely knowledgeable and gave clients exceptional service. If a person didn’t want to pay what I was worth, then they didn’t appreciate the benefit I could bring to them as their agent. Fortunately, I had plenty of clients who did appreciate it and were happy to pay my full commission.
So, ask yourself, “Do I really want to build my business on clients or customerswho don’t value what I have to offer — who don’t think I’m worth full price?” (By the way: Most entrepreneurs will tell you that when a client asks for a discount, they almost always turn out to be a big pain in other areas as well!)
2. You become a “commodity” rather than a true value proposition
A commodity is interchangeable and replaceable, and you don’t want what you offer to be just another something that customers can find anywhere, from anyone. Instead, it needs to have a unique value proposition; when you offer a commodity, the only thing you can do is lower prices to compete in a competitive market, and there will always be another business that will come in with prices lower than yours. Put simply, there is no benefit to being the lowest or second lowest in price, but when you have a unique value proposition, you set yourself apart — offer something that no one else in your industry does, so price is not an issue.
Ask yourself, “Do I want my business based on the never-ending battle of lowering price to stay competitive?” Wouldn’t you rather increase your value instead?
3. You’re training people to wait for the discount
Think about it: When a service or product goes “On Sale!” frequently, don’t you wait to purchase it until the next sale? Everybody wants a good deal, so they’d almost feel foolish paying full price when they can just wait it out until the next discount comes along. The result for a business is erratic cash flow and workloads that spike then plummet drastically.
So, ask yourself, “Do I really want to build a feast or famine type of business?”
4. Loss of self-confidence
It’s not just the world at large that thinks lesser cost equals lesser value: When we get into the habit of discounting, we ourselves begin to believe that a discounted price is the actual worth of what we’re offering. One consequence is that we lose confidence and begin to hesitate in charging full price — start to question whether a product or service is really worth what we originally thought. That reduction in self-confidence makes customers question whether they can trust us.
Ask yourself, “Does what I offer bring enough value to clients to be worth its full price?” If not, rather than discounting, add more value!
5. The temptation to cut corners
I hope we all start out with the intention of bringing exceptional service to clients and customers, but when you make a habit of discounting, the natural tendency is to back off and do less for them. This might be a conscious move to keep profit margins from slipping, or it may just be an unconscious result of less enthusiasm or drive.
Ask yourself, “Am I as excited to work hard for customers when they aren’t paying full price? If I’m giving less than I can, how will that effect my business in the long run?”
Doing discounting right
Even with all these hazards, you actually can offer discounts if you do it correctly. One example is an “exclusive,” where you offer a discount to prior customers or specific groups, and which can be very effective. You can also use early bird specials or limited-time offers effectively, just as long as they don’t happen too often.
To build your customer base, you could additionally consider some kind of loss leader that’s different than your main product. If that loss leader is truly valuable to them, people will assume that your main offering will be as well.
The key is figuring out what your product or service is really worth in terms of the value it brings to clients or customers — not how much it cost you and not how much profit you want to make, but it’s true value. Once you know that, charge accordingly, and with confidence!
Entrepreneur
