So you have decided that you want to adopt a low-end competitive pricing strategy, remember that your profit margin per sale is going to be less so you’ll need to focus on reducing your costs.
The Iowa SBDC recommends several best practices for this approach:
The Iowa SBDC recommends several best practices for this approach:
- Obtain the best prices possible for products
- Locate the business in an inexpensive location
- Closely control inventory
- Limit retail to fast-moving items
- Design advertising to concentrate on "price specials"
- Offer limited services
Lets take a look at these individually.
Obtain the Best Prices Possible for Products
Buy in bulk and stock up during sales. Find less expensive substitute products - every penny counts when you have a slim profit margin (this is a huge reason so many discount salons turn to MMA! Don't be tempted... there are plenty of inexpensive EMA brands out there).
Locate the business in an inexpensive location
You will need to assess your location and determine if moving your business to a cheaper location is worth it - will it be too out-if-the-way for a lot of walk in clientel? Is it in too seedy of a location that your regular clients won't like to drive there? There is a difference between inexpensive and cheap - do your research and figure out where your business might thrive.
Closely control inventory
This one is a bit harder, but determining how much liquid and powder should be used per service and making sure to charge for longer nails that take more product will be very important. Using only one paper towel and 2 cotton pads per service WILL make a difference. Remember, every cent counts.
Limit retail to fast-moving items
Retail can bring in a lot of money, but don't stock items that will languish on your shelves for months - you will not want to have your cash tied up in retail that is not moving.
Design advertising to concentrate on "price specials"
This is a given. Since your target market will be clients who are looking for the best price, you will need to make sure to entice them. That also means your services should be priced with a profit margin that allows setting sale prices and still making a profit. This is why it is so important to know your numbers!
Offer limited services
The more services you offer, the more of your money will be tied up in stock. If your clients never get gel nails, don't offer them - otherwise you will have a lot of money in product and equipment sitting in your desk not being used. Have a limited basic service list so you can have limited stock.
Negative Aspects of Low Pricing
Remember: cutting prices can have a number of consequences. The SBA (Small Business Association) points out:
- It lowers the perceived value of your brand and product –even the big brands are guilty of this and the effect over time is detrimental. Like everyone else, many mall-based clothing chains are struggling to hang on to their market share in this tough economy, and are literally handing out online coupon codes and deep discount sales on a weekly basis. This in turn leads the customer to know and expect price cuts, and, of course, any informed buyer is going to hold out for the next sale rather than pay full price for a product they have come to see as over-priced.
- Once you cut prices it’s hard to put them up again – anyone who has ever bartered or sold anything can tell you that once you take that price down it’s very hard to justify adjusting those prices up again.
- It attracts customers who only care about price points – a business’s unique value very rarely hinges on price; it’s usually a combination of price, product, reputation, and value that it brings to the market it serves. By changing your market strategy to focus on cutting prices you are essentially undermining all the good work you’ve done to build your brand, and there’s no going back – you’ll find yourself having to cut prices on every service you offer.
- It’s a war you can’t win – cutting prices across the board is never a good idea because when you cut, the competition cuts, until the business willing to tolerate the lowest margins prevails and it’s usually the lower quality competitor. There are no winners here.
With all this talk about price it’s easily forgotten that most small businesses build their brand and their success on the value they deliver. Value is so much more than price, it embodies the product, your team, your leadership, and customer service – and it can help differentiate you in a crowded and competitive market.
Selling on this value instead of price will consistently differentiate you for the long term despite the temptation to fall into a price war with the competition.
How do you do this? Know your target market, your competition, your product and your advantage.
Remember price is a reflection of your value.
Resources and References
https://www.sba.gov/blogs/how-avoid-falling-price-war-focusing-value
http://www.nailsmag.com/article/90938/the-pricing-problem
https://www.iowasbdc.org/Portals/0/ClientDocuments/How-to-Price-Your-Products-and-Services.pdf
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