Although lowering your prices usually means that you’ll sacrifice profits, selective price cuts can attract business you might not get at your regular prices. That business is incremental and can mean increased profits.
The key to profitable price cutting is to offer lower prices only to those customers who won’t buy at regular prices or to those customers whose volume makes them major contributors to your profits. Selective price cutting for these two kinds of customers requires some thought and planning, but the payoff can be big.
Cutting prices for first-time buyers often creates enough new sales to justify the lower prices. For example, many concert promoters realize that young people can’t afford to pay the regular ticket price. Instead of lowering ticket prices to everyone, they offer discount prices to students.
While it’s easy to selectively identify students because they carry ID cards, it’s more difficult for other types of businesses to identify price-sensitive customers. You can’t ask customers if they are price-sensitive because very few would give you an honest answer.
The proper way to do this is to determine the buying habits and product sensitivity to price. Walk into any automobile dealer showroom and you’ll see this strategy in action.
Skilled automobile salespeople will quickly engage you in what appears to be a casual conversation. Within minutes they’ll find out what you do for a living, where you live, and what kind of car you presently own. From what you tell them, they’ll have a very good idea about what kind of deal to offer: a low price on a “stripped” car, a high trade-in allowance on your old car, a lease instead of a purchase, or perhaps an extended warranty.
The best time to make plans for price-sensitive customers is when you are developing a new product or service. Include certain features in your new product that are very important to your least price-sensitive customers who won’t buy at your regular prices.
The most obvious use of this strategy can be seen in supermarkets, whose profits depend on their ability to attract shoppers with large families. Instead of pricing all items for a similar profit, supermarkets will offer sharply reduced prices on items which are important to large-family shoppers – sandwich bread, eggs, peanut butter, and beverages Supermarket operators know that while large-family shoppers are in the store, they’ll also buy items which have better profit margins.
In industrial markets, pricing is so critical that many companies demand that their suppliers sign a “most favored customer” contract. These contracts are an agreement by the supplier to give the customer the lower price for a specific product. Vendors often have no choice but to sign these contracts if they want to sell to large companies.
You can avoid the constraints of a most favored customer contract by making some minor changes in a product and selling it to others at a lower price and by marketing a version of the product that “more favored customer” won’t want.
The critical element in profitable price-cutting is selectivity. Across-the-board price cuts are rarely the answer to improve profits.
