Pricing Perils Should you lower your prices to attract new business?
If you run a service business and are thinking about offering a discount, you'd better think again. Business growth specialist Jeff Blackman says price promotions may be bad for business. "There's a difference between being a bargain and being cheap," explains Blackman. "Being a bargain means you deliver something of impact that's a reasonable investment. Being cheap means you're providing a service based solely on price."
In a service business, simply cutting prices may undermine the customer's perception of value, says Blackman. Because most service businesses deliver intangibles, defining value may be a challenge already. However, there are ways to use price as a tool to strengthen your business. The language you use is important; so is making sure you get something of defined value in return for the discount, Blackman says. Blackman advises his clients to never refer to a price decrease as a discount. Instead, he suggests calling them "economic concessions" and using them only to secure something from the client-such as a longer-term contract, quicker payment terms, a foot in the door if it's a new client or other benefits. Continually using discounted prices erodes profit margins and may create a negative perception of your company in the marketplace.
"Service businesses need to focus on value," Blackman explains. "By focusing on the end result and delivering more in value than the cash investment made, you don't have to rely on price considerations to get new business."
Excerpted from the April 2001 issue of Entrepreneur magazine