Why a price that is too low hurts your business
At Tenato Strategy, we often hear from businesses that pricing is one of the most difficult aspects of marketing strategy. So we thought we would provide a few brief thoughts for today on why you should avoid pricing too low. A lot of businesses (especially small businesses or start-up companies) think they should price below the competition to get going, but there distinct drawbacks to this:
- Poor first impressions. If your price is more than 10% below the next highest competitor, it can cause concern that you either aren’t doing something properly (i.e. cutting corners), or that you won’t be around next year to back up your product or service. Remember, when something is cheaper people ask, “Why is this so cheap?” which translates mentally into “What’s wrong with it? What might it be lacking?” whereas asking “Why is the price so high?” makes them think about all the things that might be better about it.
- Low pricing means lower margins. Obviously, less money on the table is the result of lower pricing. But, you might say, we will make it up in volume! The problem immediately can become “selling yourself into a corner” as we call it — i.e., you are ridiculously busy, serving clients, but for some reason, have nothing to show for it. While your competitors are able to spend on branding and differentiation themselves, you can’t afford basic advertising, can’t get the profitable clients, and can’t afford some of the basics you need – better equipment, office space, or to hire necessary help. This can quickly become a serious stalling point, and will eventually put you out of business.
- Low pricing makes it harder to “get it up”! Okay, it’s a bad joke, but it’s quite true in the literal sense. Once you start too low, you have to “inch” yourself upward – because now the customer has valued your service at the original price, and will likely think you are getting greedy by raising prices too much. If you really want to offer a low introductory price, make it blatantly obvious that you are doing so as an introductory price only. Say the actual price, starting next month will be $x, but for the first 30 days, we are offering it at x% off. This way, you’ll stimulate some more urgent trial, and make it clear your service is NOT inferior in any way. If it’s already time to raise your price, please review our article on How to Raise Prices or simply give us a call.
We welcome you to read more information on our strategic pricing methodology, or contact Tenato Strategy for a consultation today. We also would love your comments on our articles below. Thanks for visiting!