Why Lowering Prices Is Not The Best Strategy

Entrepreneurs who don’t see (or haven’t discovered) the wonders of marketing think that lowering prices is their only competitive advantage. Admittedly, every consumer wants good deals and low prices are indeed attractive at first glance.

It’s a bit confounding. First, you want to captivate your market’s attention, so you consider lowering prices. However, you’re reluctant to do more price cuts because you’re already earning peanuts as it is.

The price competition is always high in the residential home service market. Many business owners resort to a price reduction to be the most appealing choice to consumers.

The problem is that there’s always an underlying question: what’s the catch?

While everyone appreciates a good bargain, low prices muddle your product’s perception. Even sale-chasers know that they get what they pay for. Instead of building a great business, you further damage it.

Lowering prices sacrifices the value of a product, much more your own sense of value. There is no customer who wants to pay more than is necessary. For competent convenience, they’re willing to pay a reasonable price. Do you know why? Because:

“Quality is remembered right after the price is forgotten.” – Aldo Gucci

Lowering prices is NOT the best strategy, and in this article, we’ll dig deeper as to why. Keep reading.

What Happens When You Lower Prices?

Lowering prices opens your business to more consumers. After all, meager prices equate to a lower barrier to entry. This means customers reduce the perceived risk when purchasing your solution.

Isn’t that a good thing? Well, not really. 

With lower prices comes increased competition. There’s an inverse relationship between lower prices and industry competition (supply and demand). Not to mention the price matching that customers do which forces businesses to offer the cheapest price. 

Transactional shoppers dominate this competitive space. These people will haggle with business owners to get good deals on the perceived value of a product or service. They’ll back your business into a corner until you commit to a price reduction they desire.

The point is, lowering prices generally does more harm than good, and here are the specific ramifications of lowering prices:

For Home Services

Residential home services are known for selling externally triggered, grudge purchases. In other words, people buy your solutions out of necessity (externally imposed), not desire. This means that an out-of-control circumstance is what drives consumers to inquire about your products and services.

In an ideal world, consumers will always gravitate toward the lowest price, but we don’t live in an ideal world. More often than not, the lower the price, the more red flags it has. Most customers seek valuable and effective solutions, and they’re sensible enough to know that it often comes at a price.

For home services, lowering prices only compromises quality and comes at the cost of your brand recognition. 

For Leading Brands

It’s a different story when talking about leading and established businesses with solid brand recognition and reputation. The difference between household names and small to medium home service providers is expertise, not just experience. They are at the top for a reason, and their value proposition is already deemed desirable by the populace.

The perceived value that leading brands offer remains the same even if they lower prices. Lowering prices only favors top brands because the price reduction casts a wider net to fish customers that seek value.

Unless you’re a household name in the home services industry, lowering prices is a bad idea. With good marketing and flawless advertising, you can prove your value even if you ask for a reasonable premium. If that’s what you want, Wizard of Sales® can make that happen. Book a call.

The Law of Demand

Okay, okay, I hear you… but what does the law of demand say about lowering prices?

The law of demand is one of economics’ most fundamental concepts. The law of demand states that there is a negative correlation between price and demand. In other words, the higher the price, the lower quantity is purchased by consumers.

The law of demand works alongside the law of supply in explaining how businesses price their goods and services. 

However, there is a caveat in this fundamental law that can be summarized into two Latin words: ceteris paribus. This means that the law of supply and demand works within the realm of equality or all things being equal.

In reality, there are uncontrollable determinants that invalidate the applicability of the law of demand when it comes to business. For example, price matching between two plumbers offering $99 drain check-ups may not make sense because they offer different values.

However, all things being equal, anyone will gravitate towards the plumber offering the cheapest price because there are no trade-offs.

Does Lowering Prices Increase Demand?

It’s a commonly accepted truth that all things are equal in the short term. For instance, lowering prices or offering discounts for a limited time during Black Friday or Cyber Monday. These limited-time events are powerful drivers of demand. You’ll see people lining up to the store whenever the sale arrives.

This tactic is effective for businesses with established brand recognition. If people don’t know the value of a product you’re selling, lowering prices won’t make customers rush to buy.

From a long-term perspective, lowering prices doesn’t necessarily increase demand, especially if many businesses compete in the low-price space. Ultimately, sensible shoppers will choose reasonably priced value over cheap and sketchy solutions.

How About Companies that Decrease Their Prices

Is there any way that lowering prices can benefit a brand or business?

Giving price cuts is not a crime and a mortal sin you must never commit. What I’m saying is that it shouldn’t be the foundation of the value you offer. Don’t make the “cheapest price” the reason why customers should choose your solution. Trust me, they won’t. 

Customers buy from people they trust. That means establishing solid relationships, connecting with your audiences and positioning yourself as the “authority” worth listening to.

Would you trust someone more because they lowered their price? Or would it make you wonder how low they could go?

Companies find success in offering lower prices because of often-overlooked determinants:

• You are relieving a stressor. When you address the underlying felt need of your customer to get back to a baseline of happy, people will pay more. If you lower the price, you lower the stress, but you didn’t necessarily need to. Your empathetic competence would have likely been enough to close the sale at the higher price. 
• You are more convenient. Addressing the underlying felt need of time gives you the edge on the competition. A client once went up against a $2,000 Home Warranty, and a competitive bid at $8,000 to close the deal at $13,000 with 0% financing and next day installation. Lowering prices would not allow for a superior finance option, and lost the deal to the cheaper competition.
• You’ve addressed what motivates them. Buyers are motivated by 6 different things. When you instinctively, or knowingly resolve their pain and pleasure points, you earn your keep at a higher price. Further discount is only making it harder for you to deliver a world-class buying experience at a healthy margin. 

When you get better at identifying a buyer’s underlying felt needs you can avoid lowering prices. Understanding the 6 motivations of buyers’ pain and pleasure points will solidify the sale without unnecessary or arbitrary discounting.  

There are many pitfalls to low prices, but don’t get me wrong, I am all for strategic discounting. 

Let me explain.

‘Cheaper’ and ‘lower’ are often used interchangeably but they are not the same thing. A cheaper price is often used to denote a solution that’s less expensive or of inferior quality. While a lower price means paying less for perceptually the same quality or getting a higher value versus price ratio.

How do you do this? By establishing your perfectly fair competitive advantage.

In a nutshell, this means that you should sell solutions that deliver offensively huge value to consumers. When done masterfully, you can sell solutions at a reasonable premium. They will feel affordable because you’ve stacked your value high.

No matter the social status, people love good deals. Offering reasonably priced solutions that pack customer-heavy advantages and lifetime value can be your version of a lower price.

The Importance of Excellent Customer Service

Customer service is an umbrella term that covers the entire experience a customer has with your business. This includes the initial touchpoint, buying experience, and after sales support.

Customer service is important because it is the make-or-break factor whether or not a customer buys from your business now and in the future. If they have a bad experience, they are unlikely to purchase. Conversely, having excellent customer service to complement your solutions increases the overall perceived value of a product.

Aside from a solution that answers their underlying felt needs, customers are looking for businesses they resonate with. Every good relationship is built on trust. The best way to build your reputation as a reliable and trustworthy business is through excellent customer service.

Lowering prices will not mask poor customer service, but excellent customer service will justify the gap on higher priced solutions. Services sold at a reasonable premium become the better choice when it’s complemented by excellent customer service.

In the home services industry, you need all the help you can get to increase the attractiveness of your solutions. A robust value proposition delivered via effective marketing and sales accompanied by excellent customer service make your solutions more desirable. You can achieve this without lowering prices, which can only compromise quality.

At the core of it all is effective systems and processes that help deliver your solutions efficiently. Otherwise, your reach won’t be as extensive and you’ll fail to break through your sales ceiling. Wizard of Sales® can help your business reach its full potential. Book a call.