There’s a lot of pressure in the market these days to reduce prices.  It’s not exactly new, of course, but it seems that the recession has been particularly tough on some industries.

There’s some products where the pricing is pretty clear.  It costs you $X to build the product, you need a bit of markup to cover your costs, and that’s the price.  Or perhaps your industry is so mature that everyone knows the expected price of a product.

This seems to be especially true of things people buy all the time, anywhere from a can of soda to a box of nails.

But many products and services aren’t this way.  With my professional services, for example, I run into people who are surprised by what they perceive to be the per-hour cost.  They don’t realize that the direct time I spend with them in a coaching session is a mere fraction of what it takes to run my business.  And a mere fraction of the value they’ll get out of the engagement.

So there’s a temptation to cut prices.  But that can be a very dangerous path, quickly leading to a situation where you’re actually losing money on every customer interaction and every product sale.

Yes, the greeting card you buy only costs 2¢ to manufacture.  But there’s an appreciable cost to get that card to the store where you can conveniently buy it.  And there’s the more hidden costs it takes to constantly be giving you new creative greeting cards every month.  All those artists and developers need to get paid, and they’re talented.  There’s going to be stocks of cards in stores, warehouses, and on trucks so that you can buy that card when and where you want it.

That’s why the card ends up costing you 99¢ or $3.95 or whatever.  If you want to buy a heartfelt and creative card for 5¢, then it’s time to get your crayons out.

Every product and service has a lot of add-on costs, and usually they are much larger than just the cost of what the customer perceives as the product.  As the supplier, part of your job is to properly set expectations so that you can create a sustainable business.

If it’s not sustainable, well, it’s not going to matter WHAT you charge after you’re out of business.

So when should you consider losing money on a sale?

  • When it develops a customer who is ready to pay the regular price
  • When you’re doing good and getting other kinds of benefits (i.e. giving to charity)
  • When you’re trying to shake up the market as a short term exercise

Just remember: You don’t want to train your customers that your normal pricing is bogus.  My favorite example is a well-known home goods store, which has trained its customers over many years to never walk into the store without the ubiquitous 20% discount coupon in their hands.  Most people I talk to will avoid the store if they don’t have the coupon, and will make a point to just buy one product with the discount and then buy the rest of their products at a cheaper store.

They’ve actually trained their customers to think of them as a one-time-purchase store rather than becoming loyal.  This can ruin a business.

Protect your pricing structure, and train your customers to understand that it’s a fair pricing for the value you’re giving them.  If it’s not fair, well, change your pricing.