My dad once owned a chain of 20 carpet stores in Southern California but sold them ALL in favor of one single, huge carpet warehouse that specialized in low prices.
Why?
Because he made more money with that one store. Lower prices lead to more sales, a lot more sales. It’s simple economics: Offer consumers a great deal—good products at reduced prices—and they will flock to the deal.
A reduction in price is simply that—you reduce the amount you charge for something. In the process, although you will be getting less profit on each individual sale, you make up for it in increased overall sales. People love a good deal, love spending less, and that is why a price reduction does in fact lead to more sales.
That said, you need to be smart when employing the strategy of aggressive price-cutting. If you don’t do it right, it’s not only not a competitive advantage, but it's also potentially a big mistake (and one that can cost you a lot more than wasting tens of thousands on a billboard).
The Pros and Cons of Discounts
While discounts and lower prices can indeed be great for both getting attention and getting people in the door—just look at Amazon, Costco, and Walmart—the danger is that they end up also cutting into your margins and potentially ruining your brand.
It’s equally true that, as the Harvard Business Review once pointed out, “a small business is not a little big business.” Walmart, Amazon, and fast food joints like McDonald's, have buying power and get wholesale discounts that small businesses can never match, no matter how popular the product or how clever a price-reduction strategy is employed.
And yet, it is also a fact that competition demands that small businesses be cost-conscious. Given that, there are smart ways and dumb ways to cut prices. There are pros and cons to the strategy as well. Let’s look at those so that we can better see the ways to do it right.
Pros of Cutting Prices
Yes, having a price-cutting campaign can definitely generate quick sales, but the benefits can be even greater than that.
1. Gets People in the Door
As indicated, who doesn’t love a good discount? We all do. It’s human nature. In fact, that is why it is often said that “sale” and “free” are the most powerful words in advertising.
For many years, Amazon famously did not make a profit. That was by design. Jeff Bezos’ strategy was to be the low-cost leader and thereby create a name, and a broad customer base, for his then-nascent business.
After the world learned of Amazon, it began to concentrate more on products and strategies that created a profit. But as a way to get a lot of potential customers to learn of your business, and to get them in the door (so to speak), discounting is tough to beat.
2. Generates Quick Revenue
Needless to say, a tried-and-true way to get an infusion of cash is to cut prices and have a sale. Short-term discounts create buzz (witness fast food deals) and therefore improve cash flow.
3. Moves New or Unwanted Products
Cutting prices helps introduce new products to a bigger audience. Similarly, if you have inventory that you are “stuck” with, cutting prices on those products will definitely get them sold.
4. Gives You the Competitive Advantage
With lower prices than your competitors, you may be able to attract a larger majority of customers in your area. This will give you a competitive edge, and expose more people to your business. If being the “low-cost leader” is your desired business brand (more on this in a moment), then deep discounts can work in your favor if you have the margins to sustain them!
Cons of Cutting Prices
On the flip side, cutting prices may bring you more problems than you bargained for, especially if you don't have a strategy ahead of time to recoup costs.
1. Sets Expectations for Lower Prices
If you consistently cut prices, it may be that your customer base will come to expect such discounts and may even choose to wait to buy until you offer price reductions again. In fact, discounting may even become your default brand.
2. Damages Your Reputation
A small business might want to be known for many different things, like its:
- Great products
- Superior customer service
- Values
- Convenient locations
But any of those will be secondary if price reductions become your primary sales strategy. Your brand will be about low-cost offers and discounts. Not quality. Not superiority. Not excellence. Discounts. Lower prices. If that is your intent, then go for it! But if not, be careful.
3. Turns Off Your Current Customers
While yes, everyone likes a good deal, that is likely not why your customers became your customers. They liked something about your business that was special; if low, low prices were not that thing, then your main customers may not like how much energy and effort you are putting into discounting.
In fact, you may find that the price-comparison shopper will start to become your main customer and that is usually not so desirable because all they care about are low prices. Placating that type of customer will force you to discount more and more, whether you want to or not.
And finally, your regular customers may even come to resent you for giving the sale price to everyone, or they may begin to think of your business as not so special after all.
4. Cuts into Your Margins
Most small businesses do not have a lot of wiggle room when it comes to cutting costs that may be needed to sustain lower profit margins. So, while aggressive price cutting will certainly get you more customers, in the short term, those sales will likely not end up being as profitable (or profitable at all) as your “regular” sales.
5. Gets You into a Price War
Back in the day, gas stations that were on the same corner or same street would often have a “gas war!” or a “price war!” Each would undercut the other in an effort to get drivers to pull into their station.
And getting into a price war with Amazon is a sure loser because Amazon is able to buy products at prices no small business can match, and therefore is able to sell at prices we can’t match either. A classic lose-lose scenario!
How to Cut Prices the Smart Way
OK, so what we want is to get the advantages of lower prices, of the price cut–the shoppers, the attention, the sales–without the downsides, like the "low-cost" brand damage, the potential profit problems, less desirable shoppers, and so on.
Is that possible without being Walmart? You bet. The main idea is to offer extra value, in addition to the price reductions. Here’s how:
Offer a Discount, but with a Minimum Purchase Amount
One of the problems with a discounting strategy is that it is the one-off discount purchase that often wreaks havoc on your profit margin, brand, and customer base because it’s often tough to make enough profit on a single discounted sale. Yes, cash flow and volume increases may go up in the short term with lower prices, but profit can, ironically, go down.
Better: Offer the discount, but have a minimum purchase number. For example, buy five and get 5 percent off, buy 10 and get 10 percent off.
Bundle Your Products
Cable companies love this strategy and are famous for it. For instance, they may offer HBO for free for a year, but only if you bundle that with mobile phone service and internet.
Well, if it works for them, it can work for you too. Come up with a great offer—something your customers will really like—but only offer it in conjunction with the purchase of other products or services. The discount on the desired item will get them in the door, and they will buy the other thing too. That’s called a “loss leader” strategy (the loss on the sale item leads to more overall sales), and it works.
Offer Extras
Sure, give them the sale price on the product or service, but consider tying that to another, additional, related product or service. Maybe to get the special deal they need to also buy an extended warranty, or maybe they get the first one at the regular price but get the additional one at half price.
Give the Discount only to Your Best Customers
The beauty of this idea is that, instead of diluting your brand and potentially angering your best customers by offering a discount to the world, you instead burnish your brand and make your best customers happy by offering it only to them. As much as customers like a discount, they also like being special. Indeed, making customers feel special creates “goodwill” that has numerous long-term benefits, including increased sales, word-of-mouth, and more.
Cut Prices, Yes, But Not Too Much and Not Too Often!
The bottom line is that you will keep your small business and cash flow healthy if you remember that offering lower prices doesn't mean that you have to get into a price war with other small businesses. Sure, a price cut and sale here and there can create a short-term competitive advantage, but the danger is that shoppers may come to expect it, or get used to it, or wait for it. By bundling extra value with price cuts, you can have your cake and eat it too.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe