Hell must have officially frozen over. That’s the only explanation for why the temperature has been in the low 70’s outside in South Florida over the past few evenings. It’s been pleasant and all my family and friends have all been commenting on how they’ve been able to sit outside and enjoy the cool evening air lately.
You see usually this time of year the only thing cool in South Florida is the inside of your freezer. Night time temps rarely dip below the low 80’s and the humidity always remains at 100 percent. So this nearly 10 degree drop has been quite the conversation starter.
I’ve been taking advantage of the cooler evenings myself. The wife and I had a few friends over for a bar-b-cue last Sunday evening and as usual the men folk gathered around one seating area while the women chatted in another.
One buddy of mine has an internet business much like mine and we were chatting about what was going on with it. My buddy who I’ll here on out refer to as John (yea I changed his name, this story is way too personal to use his real name), is going through a bit of a rough patch currently with his business. His products and services aren’t selling like they used to, he’s not bringing in new customers either like he used to. This has caused this cash reserves to plummet. He told me if things continue going the way they are now he only has enough cash to pay his bills for about two more months. Rightly so he’s freaked out. As we sat on my back deck last Sunday we brainstormed ways he could get his business back on track.
One of the suggestions that was brought up was lowering the prices of his goods and services. This tactic is meant to increase the amount of sales a business makes. The hope is that even though you are making less profit per unit, you’ll make up for it by returning bigger gross profits. It’s a legitimate sales tactic, but you have to be very careful using it.
The problem is that when you start discounting your goods and services, customers are never again willing to pay the old, higher prices. You won’t be able to raise your prices back up to the original price point, at least not for a long time.
Essentially slashing prices makes your product line look less valuable to customers. Their perception changes about your business. They start buying from you based on price alone. That is a scary place to be in the marketplace. No one wants to become the Wal-Mart of their industry, only known for their low prices. This leaves you in a very vulnerable position.
When you allow your customers to only view your products and services in terms of price you give up the perception of quality and value. No longer will your products be viewed as quality.
That’s the worst thing that could happen to your business, being perceived as lower quality. It’s not true. Your products and services are no different than before you cut the price on them. But all of a sudden your offerings are seen as less valuable than your competitors.
Furthermore whenever you slash the prices of goods and services you have to worry about the message it sends to your competitors. Lowering prices not only ruins the reputation you had with your customers, but it also signals to your competitors that you may be in trouble.
One scenario is that they cut their prices too in order to match yours. That may seem like a victory but it’s actually not, because you’ve now entered the dangerous game of who can undercut who. This is when one company cuts their prices and everyone else follows suit. The price slashing cycle is only broken when one of you goes out of business.
As you can probably tell I am against ever using this sales tactic. I don’t think any company that has ever used this tactic has ever come out totally unscathed. They’ve either changed the perception of themselves with their customers in a negative fashion or they’ve changed their ability to compete in the marketplace.
Instead of lowering prices I told John to try some other tactics to increase his sales and ultimately his cash reserves. First off, I told him to increase the perceived value of his products and services. This sales tactic involves maintaining the current price point and making the offer seem that much more irresistible to the customer. Usually this is done by adding a component or service to the offer. Add an e-book that goes along with the product you are selling or if your offer is for a continuity product offer to give them the first month free. Just be careful that you don’t offer the customer something more that ultimately winds up costing you more cash long-term.
You can also raise your cash reserves by cutting your costs. This is the first thing I do whenever I run into cash flow problems. I look for ways that I can reduce my monthly bills. For example look at lowering your rent, staff expenses, marketing costs, etc. Can you cut some services that you buy each month? This is a quick way to free up cash for your business.
Along with cutting your fixed bills, look at what you pay in expenses every month. Can you get a cheaper price next time on any of the things you bought? Perhaps you can switch where you shop for office supplies and lower that bill or you can investigate other manufacturers to make your goods and save money that way.
Also take a look at your inventory levels. Do you have a lot of it on hand? Sell what you have before ordering more. And next time look at ordering in smaller quantities. This will increase the per piece price you pay, but it will lower the overall amount of money you spend to acquire the goods.
The truth is that lowering your prices when you enter rough times in your business will not help you in the long term. You’ll damage your reputation and your ability to compete in the marketplace. Try lowering costs, reducing your expenses, managing your inventory closer or a combination of all of these things to before you ever lower the cost of the goods you sell.