Slashing Prices in Today’s Economy: Can you really “make it up in volume”?

By Cathy Hagan, CBA

How much will a change in price affect the demand for your product or service?  Price elasticity measures the impact of a change in the price of your product or service on the volume of sales.  An inelastic product has few substitutes and is considered essential, so a change in price, up to a certain point, makes very little difference in quantity sold, i.e., gasoline.  An elastic product has many substitutes and is not considered essential, so a change in price can make a substantial difference in the quantity sold. 

In pricing, consider this:
• In a down economy, the first impulse is to cut prices to sell more.  If a 10% decrease in price produces a 20% increase in demand, it might be worth it.  Price is lower, but sales are up enough to offset.
• Price often denotes value to the customer.  Your product or service must be better or cheaper.  Most small businesses can’t sustain being cheaper for long, so being better can really provide that competitive advantage. 
• The price you charge must cover your fixed and variable costs and deliver a profit.  Many small business owners set their price too low and wind up facing serious financial problems.
• Constantly monitor the competition, particularly if your product or service is elastic.  Customers will shop around, and now have access to so much instant information. 
• Become an “essential” product or service in the eyes of your customer – one they perceive as a need, so they are willing to pay the price.

Have you tried cutting prices?  How did work out?

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