Is Competing on Price Worth It?

These days, my mail box is filled with merchants and marketers offering a “deal.” In the paper, they even call it the “Daily Deal.” The deal is usually something like two meals for one, or a similar discount. What these folks are doing is attempting to drive some traffic in the door, with the hope that you’ll spend once you are there.

And yet, curiously, at my house, most of these offers for deals wind up in the circular file. How come? Well, if I never had much desire for the product in the first place, how much desire will be added by the promise of 10, 25 or even 50 percent off? Not much.

And yet, if you are a merchant, or marketing for one, early on in the discussion of how to build sales the idea of cutting price to drive traffic will come up. But is it worth it?

Eat the Profit?

First of all, you’ll need to calculate how much the discount is going to cut into your profit margin. Will you then be working harder to run in place by having to sell more of the product to maintain sales at a cheaper price than you had before, when the product was more expensive?

Now, if you’re running a restaurant, and there’s absolutely no one coming in, you’ve got to do something to justify keeping the lights on. But consider this: if you wander down to the Mercedes or BMW shop, are they giving two cars for the price of one, or discounting them by 25 percent? Probably not.

What’s the Perceived Value?

Now, down at the Mercedes dealership, they’re going to get every pound they can for the vehicle, and find some other way to increased perceived value by stressing improved fuel mileage, safety features, technology advancements, anything but taking less than they think the car is worth.

So, when evaluating your product, are you selling a Mercedes or a plate of potatoes? If the latter, it’s going to be hard to attach perceived value in any other way than by giving the customer more potatoes, and cutting profit margins. (Actually, they make up the food discount on the beverage).

But if you’re selling the equivalent of the Mercedes, then try to think of other ways the perceived value of the product–at the price where it makes you enough profit–can be enhanced without cutting into margin.

One more warning about price: once you start cutting, where do you stop? Cutting price actually has the effect of driving down perceived value as customers decide the product has no real price–just the cheapest one they can find.