Make sure the price is right to avoid profit pitfalls, consultant urges
A local business consultant has warned business owners across Shropshire that offering discounts and cutting prices to kick-start customer demand could actually end up harming their profit margins.
Alan Adams, Founder and Director of Shrewsbury-based Horizons Consultants, claims that putting in place the perfect pricing strategy can provide a company with a real position of strength long-term, but all too often a business owner underestimates and undersells their product or service, leaving them vulnerable to changes in customer demand.
“Especially in challenging economic times, many firms will offer discounts or price cuts to stimulate sales, but in many cases this can be counter-productive and really eat into a company’s profit margins,” Alan explained. “For instance, think of all those advertisements for sales on sofas and three piece suites – who is ever going to buy a product at full price, when they know full well that they’ll be able to pick one up cheaper in the imminent next round of sales?”
Alan advises that dropping prices by just a small amount can actually wipe out a much greater proportion of a company’s profit margins, meaning it has to significantly increase sales just to make as much money.
“Say, for example, your product or service costs £7 to provide, and you then sell it for £10 – that gives a gross profit of £3 per sale. Cutting the price by 10% to £9, without a similar reduction in the cost, leads to a profit of just £2 per sale – a third of your profits gone straight away.
“Rather than reducing prices, business owners should actually look at how they can add value to what they are offering and focus on up-selling by giving something extra, to capitalise on the customers they already have. Research shows time and time again that if a company offers a ‘premier’ product or service, one in five customers will typically take it. While in tough economic times there is always going to be an element of fear determining how a company’s prices are set, one of the worst things a business owner can do is be dictated to by this fear, as customers that are purely driven by cost will go elsewhere the moment they can find the product or service slightly cheaper,” Alan concluded.
