Is now the time to cut your price? Debbie Hancock, Southbourne Accountancy and CCCI Treasurer
Published 14:17 on 24 May 2020
Pricing done right can have an incredible impact on your profitability. Many business owners are tempted to reduce their price in line with thecompetitor. With the current pandemic they may be even more tempted to reduce theirprice to win that client. This may of course be the best course of action if they have fixed costs to cover and no cash coming in. However, if they can cover their fixed costs,they need to assess their numbers and consider the long-term implications of a price reduction on their brand,customer perception and profitability.
Below is a table summarising the potential financial impact (with an assumption that a volume-based discount cannot be negotiated on cost of goods sold):
25% increase in volume
10% decrease in price
12.5% increase in revenue
Cost of goods sold @ £70
25% decrease in net profit
Net Profit percentage
As the above table shows a 10% decrease in price, may result in 25% increase in volume.If they are then unable to negotiate anything with their stocksuppliers, then they will see a reduction in net profit and ultimately theircash position.
So, if this sounds familiar, ask yourself, does this make financial sense? Is it worth putting in all that effort, to win the client, make/produce the extra units and then to end up in a worse position? Make sure you run through your numbers, taking into consideration the non-financial information and then decide if to negotiate.
In the longer term you risk taking on a bad client, downgrading your brands reputation and working too hard for the financial gain. Dependent on your market, being the cheapest is not the best. Remember, customers may use price to determine how valuable your product or service is, so don't damage that value by going for the quick win and selling your product/services cheap. Don't be the cheap option when you can offer quality, reliability and value for money.
Last updated 11:03 on 26 May 2020