Is It OK To Lower Prices To Generate More Volume?

Clients often ask me if it makes sense to lower prices with the hope of improving profit via volume of products sold. I usually tell them that lowering prices in order to sell more volume is not necessarily a good pricing strategy. However, it's always important for clients to know which customers are buying somewhere else and might switch to them if their prices were lower.

That's not to say that prices don't matter because there is usually an acceptable range of prices that customers will pay (but for products in that range, price isn't the most important factor for them). Customers may choose from providers for reasons other than price, such as customer service, responsive sales people, choice of products and services, or just habit of the place they usually shop.

And what if the customers believe the price is not in the "acceptable" range? What if your prices are generally higher than your competitors' and this is reflected in a lower market share on that particular product? Is that a good time for you to lower your prices on that product?

It's not a simple answer: First, you have to look at your win/loss rate. That is, if your price is lower in a high-priced segment, then it may make sense to lower your prices in that segment -- but you have to avoid lowering prices where your win rate in sales is higher.

You also can't base your pricing decisions on a small sample of lost business. You have to do detailed analyses that consider your win and lose ratios, number of customers affected, and size of transaction – and you must do those analyses by segment.

Also, if you lower prices to sell to a special group, you may be including your customers who were already willing to pay a greater amount -- with the result that you are dropping the margins you had from those existing customers. So, analyze your data to find out how much incremental volume you need to gain to offset the margin you may lose from those customers.

After you determine that your prices may be broadly higher than your competitors in a particular segment and you can still make a profit at a lower price, make sure you consider other factors:

What message will you be sending to customers and prospects?

-- Saving money? If so, you are telling the customer to be price sensitive.

-- Providing better service? What are the customer's needs, e.g. their challenges; how they use the products, delivery, etc. -- and can you help them solve them?  

-- The current provider is charging too much? Maybe the customer or prospect will take this information (about you having lower prices) back to their current provider and the current provider will change their pricing to keep the customer?

-- Spoiling the customer? Doing things like lowering prices can unintentionally spoil your customers. It trains them to expect and ask for lower prices. It also signals the customer to switch to those who will always give lower prices with no other incentive. This leads you to a downward spiral.    

Bottom Line For Your Bottom Line: 

Dropping prices to win more volume is often, but not always, a bad idea. You have to look very carefully at the product or category level. In other words, you should never take this action across the board, but limit it to specific, data-supported actions. If you apply the scientific approach you will often find lower prices will lower your profits. On the other hand, you may indeed find there is an area where your prices are too high and you would recognize more profit by selling at a lower price that would generate more volume. 

 

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Scott Francis, Guest Contributor

About Author

Scott Francis is the President of Strategic Pricing Solutions, a management-consulting firm helping clients with pricing strategies, data analytics, and pricing processes. Scott has more than 25 years of pricing experience both as a consultant and in roles leading the pricing function at large corporations. Scott's thinking is heavily influenced by the data-driven approach he learned studying finance and behavioral economics while earning an MBA at the University of Chicago. Prior to forming Strategic Pricing Solutions in 2005, Scott held a variety of corporate positions including CFO, SVP of Marketing and VP of Pricing. Follow Scott on Twitter@StratPricing and at http://www.Stratpricing.com
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