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What are justified arguments for low prices?

by Oziboomer
19 replies
I'm fully aware of the risks involved in being the lowest priced competitor in the market place but are there circumstances where reduced prices make sense from a competitive, financial or marketing point of view?

The three arguments I can think of are

1. As a competitive strategy.

You have an unassailable cost advantage where you can buy or produce your products at a price that is lower than any of the competition.

2. As a financial strategy

You are not selling to generate profits but to generate cash-flow. Usually because it is a matter of survival.

3. As a marketing strategy

You are using low prices as a customer acquisition strategy and you hope to make a profit on the back end.

What are your experiences of each of these situations and what advice or suggestions can you make to help others decide whether or not to use low pricing as a strategy for their business?
#arguments #justified #low #prices
  • Profile picture of the author bizgrower
    Off season for seasonal businesses such as hotels and home improvement.
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  • Profile picture of the author Claude Whitacre
    I don't lower my price for any of those reasons. But I will lower the price, if I think it's going to speed up the buying process.

    I don't need to justify it to myself, but I do need to justify it to the customer. The reason I give is nearly always something out of my control, that makes it advantageous for them, to buy now.

    For example;

    This is the last one in stock.
    The new models just came in, and I need to liquidate the old models.
    This is the new model, but they haven't raised my price on this shipment, so I pass it on to you.

    I mention these things in passing, during the presentation. Maybe I'll refer to them as I'm closing. It sounds natural...not made up. It just pushes them over the edge. But they have to want to buy anyway. The discount, whether real or not) doesn't drive the sale.


    When selling my local marketing service, I may let it slip out that i really want to work in the client's industry...and will be asking for referrals, and I will offer an additional service. I don't discount, because my billing is pre-set. Unless they just put it all on a card, then I may offer a small discount, to "make bookkeeping easier".

    I don't advertise or market with price as a feature.
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    • Profile picture of the author savidge4
      A price strategy is complex at best and over whelming in most cases. I get the whole idea it is Just as easy to find a buyer at $100 as it is $50. but depending on the market as a whole... it maybe a tone easier to find the $50 prospects vs the $100 ones, and in the end through volume the lower market point produces the most profit.

      I have always looked for the grind point. Maximizing profit through volume. Its finding the max end of that grind point that takes a bit of work. can I stretch the $50 client up to $59.. to $69? - basically where does the volume start to drop.

      Another way to look at this is the percentage of profit per sale. In order to do this you of course have to know what the profit per item is. I cant say it even shocks me anymore.. but most people have no clue what this number is. they maybe able to determine how much an item costs..and how much they are selling it for. but we all know that is NOT bottom line profit.

      So the idea is this. you want to drop the price to decrease profit by 50% basically selling 2 to get to the same profit margin of selling 1. If all you do is sell twice as many as you did before.. well that doesn't make sense. BUT if you start selling 3x 4x or more.... let the grind begin. optimizing profit through volume.

      The flip side of this growth is ultimately the cost. can you perform 3x and 4x of current volume without increasing cost? If you have to hire help.. you are eating that profit. if you are paying for over time you are eating that profit. Can you balance these expenses by buying materials in greater volume and lessor price to balance the expense? can you find ways to stabilize expense, again to maximize profit?

      This becomes a juggle. and to really get it right.. you had better really know your numbers. You have to quickly be able to identify where the increase may become a burden and not a profit.

      Welcome to the world of Business!
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    • Profile picture of the author Oziboomer
      Originally Posted by Claude Whitacre View Post

      I don't lower my price for any of those reasons. But I will lower the price, if I think it's going to speed up the buying process.

      I don't need to justify it to myself, but I do need to justify it to the customer. The reason I give is nearly always something out of my control, that makes it advantageous for them, to buy now.

      For example;

      This is the last one in stock.
      The new models just came in, and I need to liquidate the old models.
      This is the new model, but they haven't raised my price on this shipment, so I pass it on to you.

      I mention these things in passing, during the presentation. Maybe I'll refer to them as I'm closing. It sounds natural...not made up. It just pushes them over the edge. But they have to want to buy anyway. The discount, whether real or not) doesn't drive the sale.
      Thanks Claude.

      It's that old Cialdini observation of offering a "reason why"

      I bet you don't need to offer much...in fact...I bet you only need to say this is the last one left and the new stock will be going up.

      People love "reasons why"

      One I often use, not necessarily in relation to price is, "The majority"

      "You know...because of the changing exchange rates...the majority of people are grabbing one before the price rises" - for example.

      Couple the presumption with the influence.

      When I spoke with you last I loved that observation you made about when selling to two people how you would say "Is that ok with you too?" ..noted and appreciated

      People love to be part of the majority.

      Thanks again.
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      • Profile picture of the author Claude Whitacre
        Originally Posted by Oziboomer View Post

        Thanks Claude.

        It's that old Cialdini observation of offering a "reason why"

        I bet you don't need to offer much...in fact...I bet you only need to say this is the last one left and the new stock will be going up.

        People love "reasons why".
        You're right, it doesn't have to be a great reason. Customers will accept almost any reason for a discount. I like to make the reason one that's beyond my control....or a singular reason that will likely not be available in the future. It stops any argument about me giving the same discount if they call later. "It isn't me, it's this thing, beyond my control" (I don't really say it, but its strongly conveyed)



        Originally Posted by Oziboomer View Post

        One I often use, not necessarily in relation to price is, "The majority"

        "You know...because of the changing exchange rates...the majority of people are grabbing one before the price rises" - for example.

        Couple the presumption with the influence.

        When I spoke with you last I loved that observation you made about when selling to two people how you would say "Is that ok with you too?" ..noted and appreciated

        People love to be part of the majority.

        Thanks again.

        I like "the majority". I tend to use the word "popular". "May I tell you which choice is the most popular?". And I use, "May I make a suggestion?".
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    • Profile picture of the author seven4
      Originally Posted by Claude Whitacre View Post

      I don't lower my price for any of those reasons. But I will lower the price, if I think it's going to speed up the buying process.
      I think this is the main argument: offer something cheap to get more sales.
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  • Profile picture of the author savidge4
    Originally Posted by Oziboomer View Post

    1. As a competitive strategy.

    You have an unassailable cost advantage where you can buy or produce your products at a price that is lower than any of the competition.
    For me, this is where you look for the Grind point and run

    Originally Posted by Oziboomer View Post

    2. As a financial strategy

    You are not selling to generate profits but to generate cash-flow. Usually because it is a matter of survival.
    Survival is simply prolonging death... I would rather close my doors before I went here. I would only go here if it was the first step in a plan to optimize and produce profit at the same sales level, or cultivating new avenues for growth. If you are doing it just to stay where you are at? just close the doors and be done already

    Originally Posted by Oziboomer View Post

    3. As a marketing strategy

    You are using low prices as a customer acquisition strategy and you hope to make a profit on the back end.
    This one gets interesting. Essentially trip wiring your way into profits. It works no question about it. All over the net in non physical product industries ( services, and electronic delivery ) OTO's and upsells are "normal" . You get into physical products ( a toaster ) and this model really doesn't work.

    But then enters the term "Loss Leader". This for physical products works. However, I would suggest it does not work as well in the online environment as it does in the brick and mortar environment. The psychology of online "impulse" and offline impulse are simply 2 different animals
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  • Profile picture of the author bizgrower
    Playing with the grind point gets interesting.

    The past few months at my hotel were higher prices, fewer customers - a little,
    - yet, a lot higher revenues. A downside is less work for my housekeepers.

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  • Profile picture of the author Peter Lessard
    I have seen lower pricing used repeatedly specifically to put a competitor out of business.
    The one with the deeper pockets wins.

    For example a well established mom and pop styled pizzeria in my town has been at their location for 20 years. Many times over the years someone has taken over a nearby location to make a go of it. Unfortunately for them as soon as this happens the established pizzeria bombards mail boxes with discount coupons, 2for1 deals etc.. until the new competitor shuts its doors. The owners have no issue breaking even or losing money for 6 months to put the place out of business and enjoy another couple of years of being the only mom and pop nearby. It is so common that I have heard many of the business owners that know each other starting a betting pool to see how long the "new guy" will last.

    I have also been asked many times in consultations "how much will it cost me to put them out of business?".

    Of course this same thing happens with much larger players in every industry. They view cutting prices as an investment just like an ad budget to gain market share.

    I feel for new business owners that do not realize when they open their doors that they have much more to worry about than doing a good job and serving clients. Just because you are not being shot at does not mean you are not at war.
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    • Profile picture of the author The Niche Man
      Your "Special" Strategy for low price.
      I often give repeat customers a discount as a customer appreciation strategy. Everyone wants to feel they're getting something the general public isn't, right? This strategy is a workhorse for maintaining good will and driving repeat business.

      With first time customers I give a discount coupon on their next purchase. Not the yawner 10% like my competition, but 20% minimum to 50%, depending how much their first order is.
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    • Profile picture of the author Oziboomer
      Originally Posted by Peter Lessard View Post

      I have seen lower pricing used repeatedly specifically to put a competitor out of business.
      The one with the deeper pockets wins.

      I have also been asked many times in consultations "how much will it cost me to put them out of business?".

      Of course this same thing happens with much larger players in every industry. They view cutting prices as an investment just like an ad budget to gain market share.....
      Do you think new businesses are blind to the fact that they cannot win the battle of lower prices?

      Is there a naivety that a new business owner has that "lures" them into a false sense that they will succeed because they believe they offer better service at a lower price?
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      • Profile picture of the author Claude Whitacre
        Originally Posted by seven4 View Post

        I think this is the main argument: offer something cheap to get more sales.
        Yes.


        Originally Posted by Oziboomer View Post

        Do you think new businesses are blind to the fact that they cannot win the battle of lower prices?

        Is there a naivety that a new business owner has that "lures" them into a false sense that they will succeed because they believe they offer better service at a lower price?
        I think so. I've consulted with retailers that have a "we offer the lowest prices" mentality. But they don't use it strategically. They really have the lowest prices on everything. They think it will build a big following, which it will. But they become enamored with volume, and not net profit.

        They eventually fall into the trap of not just having the lowest prices, but also selling the cheapest items/services. Because their entire appeal, is lower prices.

        This is different (I know you know) from having Trip Wire front end offers to start the buying process.
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  • Profile picture of the author Woomeister
    I'm an ebay powerseller and a tactic used to manipulate their algorithm is the following.

    After optimising your listing fully using techniques I won't go into here you sell your item at a price so low that it gets found on the lowest P&p filter. People use this all the time in most niches and it will get you a great deal of views which in my case turn in to a great deal of sales. Sales to views is the main ranking factor on ebay currently and I can dominate a keyword within my niche within a single month. Then I put the price up to a level that I'm happy with and hey presto. I know this is a very case specific answer but it's a justification that makes me a lot of £££.

    Perception based on price is an interesting area that I have spent many an hour mulling over and I've come to the conclusion that buyers have several different mind sets when it comes to buying certain products.
    1. It's cheap and that's all that matters
    2. Hmmm....it's too cheap for what I expect so therefore it's possibly no good.
    3. I won't buy 'cheap' stuff as it's bound to be fake.

    Understanding this is very important as an online seller and 'selling' your modus operandi to potential customers is just as important as the price. I have a manufacturing company and sell 'premium' products and 'cheap products'. This is so I can sell to the different types of buyer.
    I actively market my cheap products as 'white label' 'basic but good, no frills packaging etc and actively tell my customers why it's cheaper. In actual fact the products are the same sold by different brands.

    So another reason to sell cheap, lower prices is to juxtapose the more expensive and sell to differing mind sets.
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    • Profile picture of the author Oziboomer
      Originally Posted by Woomeister View Post

      So another reason to sell cheap, lower prices is to juxtapose the more expensive and sell to differing mind sets.
      Thanks Woomeister.

      So this is a competitive strategy to help potentially improve an Ebay ranking and at the same time make a lot of sales.

      I'm sure there is a lot more to the system you have developed but I appreciate your analysis ---and I'm sure others will do the same--- and willingness to share what you've discovered works for you.

      People often disconnect the increased volume required to make a sustainable profit and they often don't realise that to compete on price requires an advantage that you have obviously developed.

      Thank you for sharing
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  • Profile picture of the author Jonwebb
    Prices are generally lower depending on the client's customers. A boutique cleaning service usually can't pay as high as a roofing contractor.
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    • Profile picture of the author iAmNameLess
      Originally Posted by Jonwebb View Post

      Prices are generally lower depending on the client's customers. A boutique cleaning service usually can't pay as high as a roofing contractor.
      That has nothing to do with the thread.

      I see low prices as a growth strategy. Once you have high enough growth and can own a nice chunk of the market, you can focus more on profit. I don't think it's a strategy for someone trying to run a passive business, as low prices as part of a growth strategy is a very aggressive way to build your business.
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      • Profile picture of the author Oziboomer
        Originally Posted by iAmNameLess View Post

        I see low prices as a growth strategy. Once you have high enough growth and can own a nice chunk of the market, you can focus more on profit. I don't think it's a strategy for someone trying to run a passive business, as low prices as part of a growth strategy is a very aggressive way to build your business.
        Thanks Nathan for dropping by.

        If a business has the capacity to absorb the financial pain of riding that growth and understands the LTV of the acquisition strategy then it can make or break them.

        Not for the faint hearted. Ha!

        I often use this approach when supplying some of our products for Charity fundraisers.

        Rather than just providing cash donations or just gifting finished products I will suggest that my company is happy to provide the labor cost in producing an item if the fundraiser will meet the material cost.

        It weeds out the non-serious organizations and we also usually get introduced to the other businesses that are quite financial and able to provide support because they are often the people who meet the hard dollar costs that are incurred by the charity.

        These are usually professional firms in legal or accounting firms and we often get a ton of quality referrals and usually get repeat real business from the businesses over the following years post donation.
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  • Profile picture of the author misterme
    I see one more reason why to price low.

    Make a bunch of cash and run. No interest in staying around.
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