Lowering your selling prices will increase sales when your product or service has an elastic demand curve i.e. when you slightly lower your prices, volume goes up substantially. This will be a profitable strategy if lower prices produce greater gross profits due to increased sales volume even though the profit per unit has fallen.
Additional benefits of lowering prices include:
- Prices lower than your competition tells customers who buy based on value and affordability that you are a bargain.
- If you have a large share of the market and can survive on low margins, lowering your price makes it more difficult for your competitors to compete.
- Prevents new competitors from entering the market, as they will have start-up costs that increase their overhead and lower their profit margins at a time when they have low sales volumes.
- Attracting new customers without a large marketing plan.
- Determine whether your product or service has an elastic demand curve - there is no point lowering your selling prices unless it will substantially increase volume sold.
- Find out what your competitors are offering and their current pricing.
- Determine your objective in lower prices - i.e. to increase sales, increase gross profits, wipe out the competition, prevent new competitors entering the market, etc.
- Calculate the financial effect of lower prices and higher volumes on your gross profit and net profit.
- Lowering selling prices often requires the business to reduce costs at the same time.
- Consider whether reducing prices will reduce the businesses reputation, brand quality, or credibility.
- Limit the initial selling price reduction to 10%, and monitor the effect on sales, gross profits, and net profit.