>The Price Reduction Death Spiral

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This past week I received a distressed email from a small business in Georgia considering a price reduction. The dilemma was how best to compete with a competitor in view of the economy. The decision? Lower or raise prices against a competitor that had recently substantially reduced prices. The competitor’s price could conceivably be as little as one-third our hero’s price.

spiral

First, I salute the business for even considering a price increase. She knew that a lower price gives the perception that “we are not worth the high price tag despite being by far the much better value and product.” Even so, I’ll admit that that’s a tough scenario. Your competitor drastically slashes prices and you’re sitting there with a much higher price. What to do?

The Price Reduction Formula

First, you have to understand what happens to your business when you reduce prices. You make it more difficult for you to make a profit. In the process, you also create a heavier workload. In short: less profit, more work. You may increase revenue, but more revenue does not equal a greater profit.

To illustrate, take a look at this formula from John DiJulius’ excellent book, What’s the Secret? I call it the Price Reduction Death Spiral.

Price reduction = resource reduction = Service reduction = Value reduction = Customer reduction

When you reduce your prices, you diminish your resources. A reduced price means a reduced profit margin. You still have to work just as hard to sell the same product, but now you get less money for the same amount of work. To compensate, price-reducing businesses will often reduce staff or cut services. The result is less value to the customer. While may initially get a quick boost in business, customers will realize that your value proposition is not what it used to be. Many will search for greater value and leave you.

Another unwanted result is that the only customers who stick with you are lowest-price customers. These customers are not loyal to you, they are loyal to the price. If they find a lower price they are gone, forcing you to lower your price again to keep them. Now you see why I call this a death spiral. It ultimately leads to the slow death of your business.

How to Build Value

Regular readers of this blog know that the way to increase value and customer loyalty is to deliver a remarkable customer experience. You can use my free resource, The Customer Experience Map to design a customer experience with magic spots. The result is an experience that inspires loyalty and sparks conversation.

The challenge is that this process is not an immediate fix. It takes a little patience to allow time for the word of mouth to spread and take root. But once it does, you will not be judged by your price, but instead by the value of your customer’s experience. And you get to avoid stepping on to a spiral that leads no where but down.

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