Impact of Increase or Decrease in Prices on Business:- The idea behind this publication is to warn the reader about the application of ready-made pricing principles. It is necessary to think beyond the simple theoretical statements that work but in very specific conditions that we may be led to forget, especially the elasticity of demand in relation to price. Below this post is all about the impact of increase or decrease in prices on your business.
Decrease in Prices may Result
- Increase your Market Share
In theory yes Referring to classic strategic models. But in practice, things are not so mechanical. Lowering its rates is to somehow confess to its customers and prospects that its other arguments are not so strong. So, certainly, you will win some markets; but in parallel, your competitive position will weaken because you will be like the others. This can quickly translate into competitive bidding where you did not expect it. What will you do with your current customers? Lower their prices and lose in profitability and credibility? Leave them the same conditions with the risk of seeing them leave the day they learn that the new neighbor, a new customer, is paying 30% less for your products? Another counter argument: such a policy attracts a “prize-winning” clientele that will leave you as soon as a competitor does better! And precisely, one of the most devastating effects is the reaction of the competition. You risk triggering a price war. The result of this strategy will end with the same volumes sold, but at lower rates.
- Become Competitive
But if your product or service is up to scratch … If quality is your main distinguishing feature, lowering the price can blur your image.
- Help Salespeople
When your only argument is price, trading becomes difficult. Do you really think that your salespeople are satisfied to find themselves in a tariff war involving successive cuts that cut your margin? And their bonuses!
Increase in Prices may Result
- Losing Customers
Yes, if you make + 50%, some are likely to compete. On the other hand, for a moderate price increase, if your customers are loyal and satisfied with your services, will they really risk taking the competition? Increased risk in business relationships B to B…
- Increase your Profit
This is the counter argument of the previous proposition. Unreasonably increasing tariffs are likely to drop sales volumes. What you earn on one side, you lose it on the other. With caution, if you are a manufacturer, the drop in volumes will have consequences on your production costs: rising purchase prices because less quantity discounts, overcapacity, etc.
- Enhance your Product
If your product is of average quality, you can push your rates up; it will remain in the minds of consumers an average product. With the risk of selling less: why will a buyer spend more on such a product?
- Select your Customers
It is a complement of the previous shortcut. It is still necessary to have an offer that allows you to select your customers. This strategy implies a focus on the medium / high end, your products and services must be up to par!
- Go bankrupt
Again, it’s all about balance and measurement. If your offer tolerates a rate increase because your products and services have strong competitive advantages beyond the tariff considerations, you certainly have room to maneuver.
In Conclusion
The purpose of this post is not to denounce the main principles acquired in the management schools, but rather to warn about the shortcuts that can be made by deciding without taking into account all the elements of context: its strategy, its offer , competition, customer expectations, cost and cost structure, etc.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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