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Consequences of a Decrease in the Price of Goods You Sell

Amelia Grant

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Consequences of a Decrease in the Price of Goods You Sell 1

Pricing is one of the pillars of the marketing strategy. At the same time, it should fit both in the production process and in the positioning of the product on the market. When it comes to lowering the price, any entrepreneur has two different options. The manager can do it for a while (on a discount basis) or leave such a price forever. Regardless of the chosen option, you need to know about the advantages and disadvantages of both.

High and Low Prices

The price of your product determines not only its availability to customers. It also has a psychological effect on the perception of product importance. Regardless of big price or small, it directly tells the client the amount of effort spent on a product or service. And this volume instantly develops in the head of the buyer when looking at the price tag. Price is a measure of customer benefit. If you set the price of your product lower than competitors, then your message will be perceived differently depending on whom you addressed it. 

A buyer of a premium segment is often looking for a product that will allow itself to be associated with the elite community. A low price will contradict its consumer ideology and indicate a low-quality product. The fact that everyone can afford this product depreciates its uniqueness and discourages buyers who are looking for this uniqueness. On the other hand, by setting a high price, you value highly first of all the clients themself and set their exclusive right to purchase goods.

It is important to understand that the premium product does not consist only of its high price. Your offer should be accompanied by quality service or additional exclusive features. These elements naturally increase the added value of your product and fully justify the high price inherent in it.

Profit Question

While maintaining the same costs of goods production, a decrease in its price will also indicate a decrease in the profitability of one unit. In this case, the entrepreneur relies on a market pattern that reducing the price increases the demand for the product and the volume of sales, which compensates for the low profitability. But a price increase, on the contrary, increases the added value and revenue per unit of goods, which in the long run can lead to a drop in demand. 

There are strategies in which you can increase the price of your product or service without losing sales. But most of the entrepreneurs are forced to seek a compromise that will equally increase sales and maximize profits. The best way to find this compromise is to test the price in several market locations, whether in different cities, online, or offline spaces. Another traditional option is competitor price monitoring.

Competition Rules

The feasibility of lowering the price rests on a simple and obvious argument, to increase product competitiveness in the market. Distracting from conversations about the premium segment the truth is that the client will choose a product that is cheaper. In this situation, new players on the market are very tempted as their desire to correct the established pricing policy is due to the need for attention. 

As soon as this attention is received and the company secures a stable flow of customers, the price can be set up to the average market level. But such a strategy is not always beneficial.

As mentioned above, a price increase entails a drop in profitability. In this case, the profitability of the enterprise is can be ensured by a large turnover. But this strategy works only in the long term, and, only large companies can afford it. A low price establishes a filter for entering the market and on the one hand, favorable for large companies, on the other stagnating development of competition.

If a small business tries to launch a price reduction strategy, then it risks laying the foundation for a price race. As soon as a participant appears on the market artificially lowering the price, this detonates a similar action from the others. In order to secure a competitive advantage, large companies will also start to reduce prices. Even if profitability will fall, these will not be fatal for them but a small firm that uses it as a temporary marketing tool will lose this advantage.

In this case, the scenario described above may repeat when large companies reduce prices, as a result of which smaller firms are knocked out of the market. Pricing policies should be approached delicately so as not to trigger a consistent mechanism of global change. It’s worth lowering prices you must after strategic planning which guarantees that you can resist a competitive race. But it is much more reliable to do this by expanding the assortment. 

If exists a product with an established price on the market, offering a cheaper alternative will be your advantage. Instead of artificially breaking the system and sacrificing profitability, you can act progressively by offering innovative solutions. In other cases, the price reduction should be local in the form of promotional programs or sales.

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