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Thinking of instituting price cuts? Here’s some food for thought for sales and marketing

June 11, 2010
Image of price reduction tag on A Brand Day Out

Price reduction strategy? Check for profitability and strategic outcomes before agreeing on discounts

There are times, particularly with businesses with older product lines, when the topic comes up around the board table about reducing prices. Sometimes the advocate is the sales director who has experience of shifting product at lower prices. Sometimes it might be the marketing director. But whoever it is, think twice before agreeing the strategy. Here are some guidelines to helping you when the discussion gets heated around the table:

Product value cannot be leveraged:

If you are a publisher, for example, you might have a range of books selling at a price band below £10. There is nothing you can do to leverage value from these products. What you do in this instance is not lower the price but hold steady.

 If your board decision is to lower the price then the question has to be asked: “will I sell more and at a faster rate?” If the answer is “no, sales will remain the same”, then there is no justification for lowering the price – unless you are seeking just to clear stock which is not selling at all. Stock clearance is a strategy – but be careful how it impacts on your brand. Always remember – what are your strategic outcomes?

Discount tracks price

A problem can occur if prices come down AND customers attempt to bargain based on their standard discount structure at the full price (this may well occur in a trade/retail environment). Here, you need to ensure that discounting (i.e. the trade discount) tracks at the reduced price – otherwise the impact on your price waterfall (and overall profitability) will be dramatic. Commonsense, but you’d be surprised how some sales go…

Key accounts

Most companies have what they call their Key Accounts, usually given higher discounts on account of their size. However, in recessionary times, these accounts will come to question the price they pay for your services. So you need to ensure you have in place a logical price matrix allowing you to slice off different elements profitably – enabling your customer to reduce cost but you to retain profit.

Of course, this requires an element of training and rigour as the fear of losing a key account often drives companies to act desperately. It is worth remembering that every account should be measured on its profitability so that, if necessary, you can decide to lose the account if the profit is not there. (see also, A Brand Day Out on discounts via your sales team)

Legacy discounts

I can think of a well-known City shirt retailer whose business proposition is always based on discounted price. This creates a problem with perception of actual price and perceived value. In situations such as this, it is important that you always state (either via the sales people or your marketing collateral) the inherent value deliverables of your product.

If you have such a range (or a legacy of offering discounts perhaps due to mismanagement rather than strategy), you must avoid your product range being seen as a commodity which is open to bargaining. There may be elements of your product which are  not essential to the value delivery and which can be removed – enabling the product to be sold at the legacy discounted price but delivering a higher margin.

Inclusion

At the beginning of this brief article, I created a scenario of the sales director and the marketing director. Of course, pricing is a strategic marketing issue and must therefore include all key players in decisions. Production teams can lower unit costs; accounts can work out individual product line profitability and determine elasticity response; all teams can look at efficiency.

In the end, price reduction – as we have said before on A Brand Day Out – should only be implemented if there is a consumer behavioural trait in return. If you reduce prices just to stand still, then you are needlessly surrendering profit. A company wide, in-depth knowledge of product value, combined with detailed price matrices, will provide a more robust understanding of what you can do, how you can do it, and how you can retain profits.

Image courtesy of g4tv.com

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