From the April 2009 issue of Entrepreneur
When to Lower Your Price Point

The price debate is a yo-yo dilemma with serious consequences for your business. How do you know if you should be fighting for every penny or luring in customers with low-price deals? You'll pay the price if you swing the wrong way, so here's a guide to navigating the price point waters.

Pricing Scenarios
Before making any rash pricing decisions, step out of your role as entrepreneur and into the role of customer. Looking at the situation through a customer's eyes may shed light on how changing prices, even temporarily, could have a lasting impact on your business. Consider the following scenarios presented by Michal Ann Strahilevitz, associate professor of marketing at Golden Gate University.

Scenario 1: You lower your price. Strahilevitz says research shows that consumers form a reference price for what they think is the fair price for a product. "If you lower your price, even temporarily, they're likely to see that lowest price as the 'fair price,'" she says. "If you raise it back up, they no longer see that price as fair. All consumers perceive a connection between price and quality. Discounted brands are assumed to be lower in quality. Yes, even in this economy, lowering your price can hurt your brand and your long-term sales."

Scenario 2: You raise your price. "If consumers are used to paying $10 and you go up to $15, they'll feel overcharged by $5," Strahilevitz says.

Scenario 3: You have a new product or service and start off with a relatively higher price. This may not hurt you. "Consumers with no memory for your brand may see the price as a sign of quality," says Strahilevitz. "Research also suggests that if the price is higher, the experience will be better. Of course, in this economy, overcharging is neither wise nor likely to lead to [many] sales. But if you're testing the pricing waters, it's better to start high and go down than to start low and go up."

Pricing Questions to Ask Now
Mark Loschiavo, senior executive in residence and executive director of the Baiada Center at Drexel University's LeBow College of Business, has pinpointed the following four questions as the most important to consider when thinking about a price change.

  1. Are you offering something your customers need? If not, you may need to drop prices to get a percentage of the customer's wallet. During recessions, must-haves almost always trump nice-to-haves.
  2. Are you offering an affordable luxury? During a recession, most consumers may still be willing to indulge a little.
  3. Are you offering something that can help your customers weather the recession? If so, does your marketing and sales message drive this point home? Then you may be able to price accordingly. If not, you may need to drop prices.
  4. Are you decidedly better than your competition? The more differentiated your products or services, the lower the associated price elasticity. But there are limits to this logic. Regardless of differentiation, at some point, the price or value trade-off will drive the market to the lower-priced alternative.

Consider the Alternatives
Sometimes, the answer isn't as clear-cut as a price tag. Before automatically raising or lowering prices, consider the following two strategies.

Can't afford to cut prices? Then try ramping up service. According to a recent study conducted by Accenture, 73 percent of U.S. respondents reported that they switched service providers due to poor service, compared with 47 percent who switched providers because of lower prices.

1. Eliminate fear. Sabrina Parsons, an entrepreneur and the co-author of 3 Weeks to Startup, says addressing consumer fears might be more effective than lowering prices. How do you eliminate the fear? Parsons offers these suggestions:

  • Offer a money-back guarantee to lessen the fear of buying.
  • Consider bundling some products together so you can give good prices to customers who are willing to buy multiple items.
  • Keep the price of your service the same, but offer free support.
  • Give special shipping deals to people who spend more money.

2. De-emphasize price. Lenann McGookey Gardner, an international sales and marketing consultant and the author of Got Sales? The Complete Guide to Today's Proven Methods for Selling Services, suggests these sales tactics:

  • Deal with price last--after you learn what you'll be doing for your buyer.
  • Never discuss a range of prices. People hear the lower number and negotiate down from there.
  • Talk in terms of "the investment" rather than "the price."
  • Understand that the "true price buyer" makes his buying decisions purely based on what's cheapest. If you're not the cheapest option in your industry, walk away.
  • Hone your sales and closing skills to help you deal with the ever-present price objections that kill sales.
  • Conduct current sales research about the approaches that work in today's market; don't rely on old learning.

 

Overall, consumers are spending less: The Commerce Department reported that retail sales dropped 1.8 percent in November. At press time, the decline was the fifth straight monthly drop, a record stretch of weakness.