Danger of Price Reduction
Some small businesses, attempt to compete by being lower priced. If you’ve figured out a way to produce or deliver a product for substantially less than a competitor, kudos to you. But, usually, it’s only the large businesses that already have the volume to create efficiencies of scale and buying power that can offer lower price. And, it’s not due to lower margin. It’s due to reduction in operating cost and the cost of goods sold.
It’s important not to confuse operational efficiency with margin deficiency. If your lower price is due to either a reduction in your profit margin, or you’re cutting your marketing investment to conserve cost, you are actually compromising your competitive position, not enhancing it.
When you reduce your margin or marketing budget in order to lower your price, you are effectively using price reduction as a marketing strategy with several negative effects:
• You lower the perceived value of your product or service.
• You lower your profit, in most cases much faster than you increase volume
• You dramatically increase your marketing budget by substantially more than the decrease in price.
• And, with all the money spent on price reduction, there’s no money left to invest in real marketing.
I talk to a lot of people who don’t have a marketing budget. The reason is that they don’t have enough profit margin to support the marketing budget. The fact of the matter is that they have a huge marketing budget. It’s just in the form of price reduction.
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