Is Reducing Prices Good Business?

Marketing Viewpoint by Ruth Winett

Forever Stamp Prices to Drop Two Cents

The $49 roll of Forever Stamps in your desk drawer is now worth $47! In a surprising move, the USPS recently announced a reduction in the price of first class stamps. In 2013 the government allowed the USPS to raise prices temporarily to offset USPS losses during the Great Recession. The courts recently ordered the USPS to restore the lower price. If you are considering whether to decrease prices, carefully consider the likely consequences-good and bad--of a price reduction.

You may wish to lower prices if the competition has lowered prices; if your goods or services are obsolete because of newer technology; if you need to dispose of perishable goods or reduce inventory for other reasons; or if your costs have decreased.

Factors to consider if you lower prices:

Is the change one-time or permanent? What are the likely consequences of either type of change?
Will lowering prices accelerate sales now only to reduce revenue in following quarters or years?
How much will you need to increase sales volume to maintain profits? Is this achievable?
How should you time the price changes? If the change is too early or too late, it may be ineffective.
Will lowering prices devalue your goods and services?
Could a price war ensue, leading to prices that are below costs?
If necessary, could you later increase prices without alienating customers?

To calculate the impact of price reductions (or increases), refer to Charley Kyd's Excel generated calculator.

Ultimately, whether you raise or lower prices depends on your business situation and your customer base. Be sure to explore the long-term consequences of such changes. Sometimes it pays to lower prices to capture a big customer or big order. However, to protect future prices and your reputation, consider changing the offer as well. Examples of such changes are eliminating free shipping or reducing the length of a warranty. A company that provides services might change project parameters, such as decreasing the number of interviews provided or extending the project deadline. These changes will help preserve the value of your offering and give you more flexibility in the future.

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