Price Undercut Doesn't Measure Up - Underprice or undercut and
loose your business altogether.
Whenever a price of a product is too good to believe, these
raise many questions in the eyes and mind of the customer. The
next question the customer asks "so what is the catch".
Customers prefer to pay the full price of product to a cheaper
one with nasty surprises.
Psychologically many customers associate cheaper prices with
inferior goods, why sell your product cheaper if you think it is
worth more?
Sell it what its worth
The best way is not to undercut the price of your product, sell
it what it is worth, but load the product with bonuses worth
more than your price. Bonuses work well like loyalty rewards
offered by many large organisations that keeps the customer
coming back to purchase again and again.
Currently some supermarkets offer a 4 cents discount on a litre
of petrol if you purchase goods worth more than $30.
Surprisingly a recent survey indicated that larger percentage of
motorist will shop at these supermarkets to get the discounts.
They perceived it as value for money, at the same time prices at
these supermarket are not cheaper than the smaller supermarkets,
yet the consumer thinks s/he is getting a value.
"It comes down to customer perceptions"
The supermarkets win twice, not only they charge higher grocery
prices but the petrol prices at the service stations they run
are actually higher than other service stations. It comes down
to customer perceptions.
You see the comparison between; (Your Price Worth=Higher
Supermarket Prices) and (Your Loaded Bonuses=4 Cents Petrol
Discount).
Kiss Affiliates Goodbye
When your price is very low this makes it difficult for
affiliates to promote your product. Many affiliates will go for
a product that pays a higher commission for their hard earned
efforts. For example if A & B sell similar product at $10 and
$20 respectively. Affiliate will earn 50% commission on each
sale they promote, the commission on A & B products are $5 and
$10 respectively. Affiliates are more likely to promote the
higher commissioned product.
Cash Flow Difficulties
You will certainly face difficulties achieving breakeven
($sales=$Costs). You will have to work as many times (twice or
more) than your competitors, your margin has shrunk yet costs
are not down and may be going up. This means you will always
have problems meeting your immediate commitments such as lease
and wages. You may eventually be out of business if not on the
verge of bankruptcy, one of the reasons why many businesses do
not survive in their early years.
Price Reduction Triggers
There is a difference between price undercutting and price
reduction, the former may last indefinitely while the latter is
temporary. There may be situations when price reductions are
accepted, such as making way for new line of products by
clearing excess stock. In this instance you would have covered
your costs and made profits. What ever reason it is, it must be
a temporary reduction and customers must see the advertisement
such the phrase (for a limited time only or ends on 3rd of
August). Your product may become obsolete pending new improved
products. These situations applies to businesses that sell
stock, if you are in the business of selling services under no
circumstances you should reduce your prices, instead offer
customers additional services that adds value.
Conclusion
Don't always think a price reduction will bring in more sales.
Load the product with added bonuses perceived by customer as
value for money. Do not reduce your service prices but offer
value added services. Price reduction must be temporary and
customers must see the advertisement. Price undercutting reduces
your margin and ability to stay in business.