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Do the Math on Discounts

What small-business owners should know before slashing prices.

This story appears in the October 2009 issue of Entrepreneur. Subscribe »

It's a given that putting something on sale can boost . But before small- owners slash prices--and profits--they should consider all parts of the equation.

For example, Colleen McCartney, owner of Top Notch Wellness Products, struggled to set the pricing for a new nail file line. "I drastically reduced prices to gain more catalog clients," she says. "But the thought kept running through my head--are these too low, or are they not low enough to beat out the larger suppliers?"

Some entrepreneurs prefer coming out of the gate as low-cost providers. Eric Casaburi opened his national 1980s-themed gym chain RetroFitness on the premise of "more fitness, less money." He notes: "I didn't start as a $40-a-month gym--it's always been $19.99 per month. If you drop pricing, the message you send is you're in trouble. People think the club is going to decline."

Others avoid discounts altogether for fear of damaging brands. "I have not discounted the wines I sell," says Richard Shaffer, founder of Israeli Wine Direct. "If a wine I sell for $40 goes on sale for $25, people will wonder if it was ever worth $40." Instead of discounting, Shaffer is looking for less expensive wines to add to his portfolio. "It can make sense for a retailer to fill a 'value' gap with other products," he says. "But across-the-board price-cutting for premium products like wine is a bad idea."

Businesses can also alter the perception of value without cutting prices. Nicole Morell, owner of Honeybunch Homestore for Kids, has split packages of four products into two less expensive packages of two, and dressed up other offerings. "I took a humble product out of the original packaging and created something more beautiful and gift-y. I was able to sell something at a good price that looked more expensive than it was."

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