When it comes to discussing small business pricing strategies, should companies base their price on market conditions and match the competitor's price when faced with stiff competition? Or, should small businesses first understand the impact of their overhead before making any decisions on adjusting their product or service’s price? While there are pros and cons for either approach, it’s important to note that most small businesses fail to recognize the impact of overhead on their pricing decisions.
Instead, of accounting for overhead, companies tend to become reactive, instead of proactive. They adjust pricing to retain the business without first considering the consequences. Therefore, when it comes to pricing a product or service, should small businesses match the competitor's price or hold the price and risk losing the business?
When faced with stiff competition, most businesses take the easy way out and immediately match the competitor’s price. It’s a knee-jerk reaction and it’s meant to retain market share at the expense of gross profit. The intention is to retain the business with the hope of one day being able to raise prices. Unfortunately, that day rarely comes as most companies capitulate on customer pricing demands.
Granted, companies can’t afford to lose market share and business, but neither should they be willing to accept business that produces little to no profit. So, what are the likely outcomes of the company deciding to lower its price versus not lowering its price? We’ll review each one in detail.
Matching the price can be an acceptable outcome under the right circumstances. For example, if a company lowers pricing to keep market share, it must be willing to do one of three things.
First Scenario: If the company can lower its cost structure, then the new lowered price makes sense. In this case, the company is anticipating that it will be able to lower its costs on future orders.
Second Scenario: If the company can’t lower its costs, then it must raise prices at a later date, or walk away from the business. While it’s never an ideal situation to constantly raise and lower pricing, lowering price can be a short-term solution when dealing with a fluctuating market. If small businesses are willing to accept short-term losses on gross profit, then lowering the price is a reasonable outcome. However, companies must be willing to stick to their guns and raise prices if need be.
Third Scenario: if the business volume is small enough where lowering the price represents a strategic business decision, then the company can justify its decision to not raise prices in the future. However, this decision is never to be taken lightly. After all, pricing has a way of getting out into a company's market.
To learn about how to handle price demands, concessions in negotiation and scare tactics, please see: Sales Negotiation: Defend Price, Customer Scare Tactics & Managing Concessions
Hold the Price
When a small business decides to hold the price, that decision carries with it the risk of losing the business. In essence, very few small businesses have the confidence to support their product’s price. However, while there are risks, there are also benefits. The risk that the customer will leave must be tempered by the company’s understanding of its market. If the customer’s price request seems out of line with the customer’s volume, then the company could decide to hold the price. Like the previous scenario, there are three possible outcomes.
First Scenario: The company could choose to call the customer’s “bluff”, so to speak, and not lower pricing. In this case, they’re taking a calculated risk that the customer can’t secure the price they claim they’ve been offered.
Second Scenario: the company could not lower pricing, thereby possibly allowing its competitor to take the business. However, even in this situation, the company might still keep the business. In this case, the company may still be able to defend its price if it manages to convince the customer that the price is warranted.
Third Scenario: By refusing to lower the customer’s price, the small business could better position itself long-term and eventually win back the customer’s business. How is this possible? Simply put, if that customer comes back, price won’t be their deciding factor. In fact, if the customer comes back, it’s because the competitor fell short and was unable to provide the same level of service.
It’s this last outcome that most small businesses fail to recognize within their small business pricing strategies. Holding the price is a calculated move that allows companies to protect market share and distinguish their product & service offering.
To learn more about defending your position as the vendor of choice, please read: Stop Losing Business to Overseas Competitors: Define Your Customer’s True Purchasing Costs
When looking at your own small business pricing strategies, make sure to weigh the pros and cons of matching or holding your price. When faced with a decision to lower or hold prices, most small businesses are likely to capitulate for fear of losing out on an important piece of revenue. However, while there are risks associated with not lowering prices, there are significant benefits as well.
Small businesses must match their product’s price to its features and benefits and must use market based information to make decisions relative to their pricing. If the customer’s request seems out of line with the market’s standard pricing, then small businesses can decide not to lower pricing. The importance is to understand the implications of both outcomes and make a calculated decision in the best interest of the company.
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