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How to make more money --- if your competitors are discounting

18 Jun 2015

What do you do if you are in a competitive market and your opposition are crashing their prices? Do you follow suit? Can you afford not to? The temptation would be to go right in there with some matching price cuts. But cutting prices is almost always bad business. Say for example your gross profit percentage is 50% and you give a 10% discount, you would have to increase your sales volume by 25% to make the same profits – in other words you would need 25 extra customers per 100 you already have just to compensate you for the drop in price. If your margin were just 35%, you would need a 50% increase in customer numbers to compensate for a 10% discount! So you do not really want to cut your prices – what else could you do that would be cheaper. Well you could “add value”. Adding value is where you add into the sale something that costs you not very much (if anything at all) but which has a high perceived value to the customer.

Take for example a shop selling sandwiches. Say they do sandwiches for £5.00 each but their competitor up the road starts selling them for £4.00. Should they match the price? No. What if, instead of reducing the price, they offer their customers a free cup of coffee which costs them 40p.  Sure, they have cost themselves 40p per sale but that is better than costing themselves £1.00 per sale by matching their competitors. If our example business did go in for the free cup of coffee option it should be presented to the customers in terms of the value to them. So in other words the perceived value to the customer should be emphasised for maximum effect. You would not describe the cup of coffee as costing 40p – you would describe it as worth £3.00. In that way the sandwiches at £5.00 would look extremely good value compared with the competitor’s sandwiches at £4.00, it might even be that our example business could afford to put his prices up to £5.40 per sandwich to cover the cost of the cup of coffee.

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