Posted By IndustryArchive.Org on 03/25/2018 Pricing Strategy

When Is a Low Pricing Strategy Good for Your Business

By: Robert Hennessey

When Is a Low Pricing Strategy  Good for Your Business

Can a Low Price Strategy Help Your Business? 

A low pricing strategy is used too often and by too many businesses. Many businesses think that having the lowest price in the market will make them successful. It assumes you can take business from your competitors by merely selling at the lowest price.

However, for most business having the lowest price is not necessarily the best business strategy. Often established or larger competitors have the ability, with low operating costs, or the lowest production cost to out-compete a small or new business competitor on price alone. More established competitors could force you to take further price reductions that reduce your profits in trying to compete with a dominant competitor's low ball pricing to push you out of the market.

Is a Low Price Strategy Right for My Company

Evaluating whether a low price strategy is appropriate for you, starts with looking at your production or operations costs and carefully considering all the four factors listed below in your analysis. Your pricing strategy could ultimately determine your business fate quickly if you make the wrong pricing decisions. By managing your pricing strategy, properly you can extend business longevity and produce healthy profits.

  • Lowest Cost Producer or Operator
    If you can not answer yes to either of these questions, then a low-cost pricing strategy is not going to work for your firm.

    • Is your company the lowest cost product producer among all competitors?

    • If you are a service business, does your company have the lowest operating costs among all competitors?

CAUTION: If you cannot meet either of the criteria above your company should avoid a low pricing strategy.

If your company does meet one of these two criteria, you will then want to continue to evaluate these additional criteria to complete your analysis.

  • Competitive Situation
    Examine your competitor's whole product offering and don't just look at their pricing. Are they serving only price-conscious customers or the high-end customer segment? Do they offer any value-added services?

  • Determine Your Ceiling Price
    The ceiling price is the highest price the market will pay for your products or services. It is usually necessary to perform a survey of industry experts and customers to define your product or service pricing limits. You may also discover the highest price you find in the market may not be the correct ceiling price.

  • Understanding Price Elasticity
    Ultimately this is what will determine the range of pricing for your products or services. If the demand for your product or service is less elastic, then you can enjoy a higher ceiling on your prices. Meager elastic demand will depend on:

    • if there are a limited number of competitors

    • your buyer's perception of quality

    • if customers are not just looking for the lowest price in your product or service category

Having analyzed these price/demand dynamics for your products or services, you can compare these results with your costs and profit goals previously established in your in your business plan or financials. You should not automatically assume a low price strategy as the best pricing strategy and is usually best avoided by almost all businesses.

Many companies even if they are the low-cost producer or operator decide not to use a low pricing strategy for these additional reasons:

  • They do not want to jeopardize the high perceived value of their Brand in the market.

  • As the price leader, they get to dictate price increases usually being able to have the highest price increase over their competition thereby increasing their profitability.

However, there are market conditions that might force a company into a low price battle with its competitors; this is called a price war.

Business Price Wars

Avoid a price war at all costs. It can not only destroy you and those you immediately compete with you but an entire industry. Below are some steps you can implement to avoid participating in a price war.

How to Avoid a Price war

  • Develop a Strong Brand
    A strong brand that is meaningful to your customer base and will always be able to command a higher price and avoid price wars.

  • Offer Obvious Differentiation & Value-Add
    Whether it is your company, product, or service be sure, your customer base knows why you are different than your competitors and your value-added proposition of doing business with your firm.

  • Foster Exclusivity or Create a Niche
    Your ability to offer exclusive or niche products or services insulate you against declining prices in a price war.

  • Discontinue Unprofitable Products/Services
    Always be re-assessing your product or service offerings and eliminate marginal or unprofitable ones. Replace these type of products with new ones where customers recognize the value and want and are willing to pay for that value.

When a Low Price Strategy Is Appropriate

If a firm is positioned as the low-cost product producer or as a service company has the lowest operating cost then a low price strategy is a viable option. A low price strategy is effective in circumstances where a firm wants to achieve one of the following business goals.

  • To stimulate sales usually on a short-term promotional basis
  • To increase market share
  • To attempt to force a competitor out of business

In most cases, a successful low price strategy is part of a short-term promotional effort to stimulate sales or increase market share.

Carefully, consider your price decisions. Your business will likely depend on it. A company with a well thought-out pricing strategy can avoid the temptation to use a low pricing strategy and avoid price wars.

Your Bottom Line
We recommend you judiciously analyze when and how to consider applying a low pricing strategy in your business.

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