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Price Undercut Doesn’t Measure Up – Underprice or undercut and loose your business altogether.

Written By: Abraham Hanson

Whenever a price of a product is too good to believe, these raise many questions in the eyes and mind of the customer. The next question the customer asks “so what is the catch”. Customers prefer to pay the full price of product to a cheaper one with nasty surprises.

Psychologically many customers associate cheaper prices with inferior goods, why sell your product cheaper if you think it is worth more?

Sell it what its worth

The best way is not to undercut the price of your product, sell it what it is worth, but load the product with bonuses worth more than your price. Bonuses work well like loyalty rewards offered by many large organisations that keeps the customer coming back to purchase again and again.

Currently some supermarkets offer a 4 cents discount on a litre of petrol if you purchase goods worth more than $30. Surprisingly a recent survey indicated that larger percentage of motorist will shop at these supermarkets to get the discounts. They perceived it as value for money, at the same time prices at these supermarket are not cheaper than the smaller supermarkets, yet the consumer thinks s/he is getting a value.

“It comes down to customer perceptions”

The supermarkets win twice, not only they charge higher grocery prices but the petrol prices at the service stations they run are actually higher than other service stations. It comes down to customer perceptions.

You see the comparison between; (Your Price Worth=Higher Supermarket Prices) and (Your Loaded Bonuses=4 Cents Petrol Discount).

Kiss Affiliates Goodbye

When your price is very low this makes it difficult for affiliates to promote your product. Many affiliates will go for a product that pays a higher commission for their hard earned efforts. For example if A & B sell similar product at $10 and $20 respectively. Affiliate will earn 50% commission on each sale they promote, the commission on A & B products are $5 and $10 respectively. Affiliates are more likely to promote the higher commissioned product.

Cash Flow Difficulties

You will certainly face difficulties achieving breakeven ($sales=$Costs). You will have to work as many times (twice or more) than your competitors, your margin has shrunk yet costs are not down and may be going up. This means you will always have problems meeting your immediate commitments such as lease and wages. You may eventually be out of business if not on the verge of bankruptcy, one of the reasons why many businesses do not survive in their early years.

Price Reduction Triggers

There is a difference between price undercutting and price reduction, the former may last indefinitely while the latter is temporary. There may be situations when price reductions are accepted, such as making way for new line of products by clearing excess stock. In this instance you would have covered your costs and made profits. What ever reason it is, it must be a temporary reduction and customers must see the advertisement such the phrase (for a limited time only or ends on 3rd of August). Your product may become obsolete pending new improved products. These situations applies to businesses that sell stock, if you are in the business of selling services under no circumstances you should reduce your prices, instead offer customers additional services that adds value.

Conclusion

Don’t always think a price reduction will bring in more sales. Load the product with added bonuses perceived by customer as value for money. Do not reduce your service prices but offer value added services. Price reduction must be temporary and customers must see the advertisement. Price undercutting reduces your margin and ability to stay in business.
About the Author

Copyright 2005 – Abraham Hanson, is the founder of Global Business Resources- http://MotivtedProfits.com and http://www.findprod.com. He focuses on providing information helpful to self starters and small businesses.

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