Raise Prices For More Profit Or Lower Them For More Revenue?

In this day and age of consumer meltdown, high unemployment and a sense of insecurity in the economy, many small business owners are lowering their prices to rock bottom in order to stay competitive and remain in business. They believe that without lowering prices there will be no customer interest at all. Others reject this strategy, preferring to sell fewer units but at a higher gross profit.

Which is the best strategy? Both are viable in different situations.

One side argues, “I only want customers willing to pay me a reasonable price so I can guarantee the product, provide post-purchase service and keep them happy and coming back, as well as stay in business by earning adequate profit. I want customers who want the item and are willing to pay the higher price. I would rather have ten thousand customers paying $10.00 than 100,000 customers paying $1.00.” It’s an interesting point and the answer depends a lot on the type of merchandise or service you are offering as well as the type of post-purchase service expected and deemed important to the consumer.

The opposite side argues, “If I lower the price, more customers will show up. While I will earn a smaller profit on each sale, more sales will return greater profit overall despite the lower margin per sale. In fact, the lower price will result in sales I would never have made without the price reduction.” This option, however, prevents expensive support, service, guarantees, etc.

While the goal for both sides is clearly net profit, not gross revenue, these are two opposite strategies to achieve the goal. Two opposite strategies, both viable, but each with it’s own risks.

The higher margin/higher price/greater service business must be selling an item that customers want and will be willing to purchase based on other factors than price alone. The concept is perceived value: “I want it, it is a reasonable price and I get service and support as well.” Thus, while the gross revenue may be less, the seller’s margins will be higher and because there is demand for the item, he can successfully raise price and keep profits while maintaining gross revenues as well, even though they may be smaller than if he lowered price to gain additional market share. But he had better bet correctly or sales will be nonexistent. He had best be offering a desired item or service at a reasonable price even if higher then usual, and provide the service required to support the price….if wrong, sales will reduce sharply and there will be no profit at all.

The other side of the fence offers sharply reduced sale price in exchange for greater volume. The risk being that the smaller profit reduces to no profit as expenses rise and while gross revenue is up, if profits are not sustained, the business will implode.

So, which path to take? The answer depends mostly on the type of product or service you are marketing, the market you are serving and your customer profile. These factors will determine which strategy is best for your circumstances. The point is, there are two sides to the debate of how to effectively survive the downturn–one is reduced price to expand revenue, the other is increased profitability with smaller gross revenues, but more profitability overall. Greater volume at lower prices requires a far more controlled business environment as profits will only be preserved by reducing overhead and expenses, while with increased pricing, there may be more room for service expenses and overhead. But lower revenue can also be a slippery slope to insufficient profits because of reduced sales revenue below expectations. It’s a difficult choice but both are appropriate. Figure out which works best for you, your business and your product or service line before you make the bet.