A competitor has just started a 50% off price promotion. What do you do; panic and do your own 50% off price promotion, ignore it or quickly work out what is best for your business and customers?
I am writing about this as I walking past 3 retail outlets today it looks like one shop quickly followed a competitor and the other worked out what was best for their shop and customer.
The interesting thing I noticed is that the shop that cut their prices to follow their competitor actually did not appear to have the same target market as their competitor.
Price promotions have their place in the big bag of marketing tactics; however the effect on your cash flow and profitability can be harmful.
Here are 3 tips for you to consider before following your competitor in slashing prices:
Know your customers
The obvious answer is that any customer can buy at a cheaper price, however if you know your customers well then this may not be a key factor why they are loyal to your store and return on a regular basis. One of the shops only had a small sign saying sale and they certainly were not offering 50% off as this was not going to increase their customer loyalty or improve their profits.
Know your business
For every dollar you discount you need to make up in the volume of the products or services you sell. If you have small margins this could potentially mean that you are not actually making any money on each sale which will affect your cash flow and profitability. In some cases you may actually be losing money on each sale which certainly means you could better spend your marketing time and money elsewhere.
Know your Competitors
If you really know your competitor’s business, then you have a better chance of understanding why they may be conducting the price promotion. It could be to get rid of old or slow moving stock, or in today’s environment they may be working to close down or it might be that they don’t have a loyal customer base so they need to attract new customers.
Today more than ever with small business marketing, you need to carefully consider how you promote your products and services to attract and importantly retain our key customers and stay in business. Remember, planned marketing activity will always be more effective than reactive marketing activity.
Susan Oakes,
I made the following comment over at BizSugar.com:
As an experienced purchaser I know the relation between quality, price and delivery (lead) time of a product. These parts combined is the total picture for a person involved in the supply chain. This combo is effecting the bottom line at the end. I often said to my suppliers: I want to you have a profit on your products, because I want you to be able to supply my organization with goods tomorrow and for a long time to come as long as we have a mutual agreement on the quality, price and delivery time of the product.
Hi Martin,
Your experience and point of view make a lot of sense. Sometimes we forget when purchasing other businesses’ products or service that if we always want a reduced price it does affect their business.
Susan
Susan,
Yes, lower prices will lead to consequences. I must admit that I did a pretty good job at reducing the total cost and increasing the bottom line in my work as a purchaser!
Hi Sussan,
Great stuff!Kudos!Hey,I’m in dilema:I intend to offer/operate an internet service(small size-5 computers) targeting a new local learning institution with about 350 students.With this small space/machines, how can I offer low rates and at the same time make profits?Along side internet biz,I also provide photocopying services.
Hi Davis,
There is no easy answer. You either need a lot of volume or find higher margin product or services that you could also sell. The only other alternative I can think of at the moment is to find a market segment that has a higher number of people or are will to pay more.
Good luck with your venture and let me know if you have any other questions.