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Cutting Prices During a Recession – Good or Bad Idea?

Should you cut your prices to increase sales  during a recession?

Let’s Check the Math

FACT: If you cut prices by 20%, you have to sell 25% more units just to maintain revenue(break even).

During good times, a 25% increase in sales volume is asking a lot.  In a recession, the math says it’s self induced suicide for almost all who try.

We’ve all heard the saying “We lose money on every one we sell but we’ll make it up on volume.”  In reality, the math says the increased volumes rarely if ever offset the reduced revenues of slashing prices.  In essence, it’s a strategy that rarely works.

McKinsey research found that in a typical S&P 1500 company, a price cut of only 5% would have to generate increased sales volume a whopping 19% in order to pay for itself.

Is your market really full of customers who want to buy that much more right now?

ADDING FUEL TO THE FIRE

(somebody stop the bleeding.. )

If competitors match your price cut, will you be able to generate any additional sales at all? Will you be able to fill additional orders with your current employee count?  If not, do you add employees and increase your overhead? What effect will that then have?

Who’s bright idea was this anyway?

FACT:: Price Cuts Train Customers to Behave Badly.

Customers of all kinds tend to remember the lowest price they paid. In pricing theory it’s known as the “Reference Price” because customers compare all future prices against it. (any of this sound familiar? )

Plainly put, you should NEVER give something away once! If you do,  your customers will expect you can and should do it again and again.

We see it very evident in today’s marketplace. Whether it’s cash for clunkers or some other incentive program or give a way, customers are learning to buy only when products are discounted.

CUSTOMERS FOR LIFE

…not so fast.

Have you heard this before?

“Sell it to me cheap now because we have 100 other stores in the future and blah blah blah…”

So you drop your drawers thinking you’ll get the business and land that big customer and all his future business going forward right?

Fact is, he dumped his existing supplier because you were a penny cheaper. He’ll dump you the minute someone beats your price. Getting business because you are the cheapest isn’t just bad business.. it’s STUPID!

FACT: A study done by Tomkins & Associates of businesses with sales revenues of 5 to 100 million dollars showed that clients who buy strictly on price were:

  • The hardest to please.
  • The slowest to pay.
  • The hardest to collect from.
  • The most demanding on your time
  • The least likely to give you a referral or any future business.

FACT:: Customers HATE price increases more than they like PRICE CUTS!
(and…remember them even longer)

Case in point..
Winning $100 makes us feel good.
Losing $100 makes us feel much worse.
From the customer’s perspective, a price increase is a LOSS.

The Bottom Line

(The math doesn’t lie…I hate math)

When you cut a price from $1000 to $800 that is a 20% price cut.
When you return the price to $1000… That’s a 25% INCREASE – ouch!

so…

Recovering a 10% price cut takes only a 11% increase, but…
Recovery from a 40% discount will mean a 67% increase, and…
Recovering from a 70% price cut will mean imposing a whopping 233% increase.

The greater the original discount the greater the “after sale” problem becomes.

One Comment

  1. You present an excellent argument and the Tomkins & Associate assessment is spot on, but… it’s really ugly out there and competitors I have never even heard of [are] giving away the farm to get an order. Customers that have past relationships with me have bought based on price only lately. It’s definitely more challenging than in the past to keep pricing at higher margins.

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