The Pricing Paradigm: How Long Is Too Long?

November 2011

Tempted to cut prices? You're not alone. With slumping sales, many businesses have been quick to offer discounts. "Cutting prices is by far the easiest marketing technique you can use," says Frank Luby, a partner in Simon-Kucher & Partners, a pricing and marketing consultancy.

But price cuts raise some tough questions: Will deep discounts cheapen your brand? Once you cut prices, can you raise them again? How do you deal with narrower margins? Says Luby: "I try to get my clients to think about where they want to be as a brand when things turn around."

Here are two companies that made big pricing changes and the results of their decisions.

PearlParadise.com: Wooing Recessionistas
Jeremy Shepherd started to get concerned last summer. The founder of online retailer PearlParadise.com, Shepherd noticed that sales of high-end pearl necklaces were slipping, and he worried that might foreshadow a dismal holiday season. The company relies on sales of $1,000 to $5,000 pearl necklaces during the crucial end-of-year months, which typically account for about 40 percent of annual sales. But though Web traffic was up, many customers were favoring jewelry priced well under $1,000.

Instead of promoting his higher-priced items, Shepherd decided to boost sales by appealing to his customers' thriftiness. He created a "luxury for less" campaign and priced his strands of Tahitian pearls, which usually sell for $500 to $700, at $300 each. Then Shepherd spent $75,000 to promote the sale. He also revamped his website, placing lower-cost items on the home page.

Orders began to pick up. December sales volume increased 16 percent compared with the year before, with the less-expensive pearls accounting for about 40 percent of revenue. "We're working twice as many hours for less revenue," says Shepherd. Fortunately, the lifting of some import and export taxes helped him avoid a big margin cut. Revenue for the year was about $22 million, down 17 percent, but Shepherd is convinced that it could have been much worse. He projects that low-cost items will continue to make up a significant portion of current-year sales, even if it means less revenue.

Bottom line: Consumers are bargain hunting and shunning luxury goods. Cutting prices on lower-end items is a smart way to keep them spending.

ePromos: Use discounts sparingly
Last year, Jason Robbins noticed that many businesses were slashing their prices. But Robbins, the CEO of ePromos Promotional Products, a seller of logo-imprinted corporate gifts, was hesitant to join them. "We always wanted to be the service leader," he says. "Our fear was that once you get people hooked on cheap prices, they wouldn't pay full price again." After reaching $25 million, revenue had been declining, and fall sales were particularly gruesome. "Everything just froze," says Robbins. November sales were down 25 percent compared with the previous year. That month, Robbins and his team spent a tense week debating a price cut. Robbins worried about damaging the brand, but if sales didn't pick up, he thought, he might have to cut staff.

Robbins and his team eventually decided to make price cuts, but in small doses. To attract new customers, which typically account for half of the company's revenue, Robbins decided to offer a $50 discount temporarily to first-time buyers. He also decided to mark down 3,000 of the 13,000 or so promotional items ePromos sells. The moves would cut the company's margin 25 percent, but ePromos offered discounts only on products that earned the company rebates from manufacturers for meeting certain sales goals. To sweeten the deal, Robbins also offered free shipping.

After all that, sales in December were still down about 15 percent compared with the previous year, but it was a big improvement over November's numbers. "We believe we maintained our position as a high-service competitor and didn't damage our reputation," says Robbins. Revenue fell about 8 percent, and Robbins decided to continue his price cut experiment this year.

Bottom line: Competing on service instead of price is challenging in a down economy, but entering a price war with competitors is risky. Limited discounts can boost sales without branding the company as a discount seller.

Sources: "Pricing: How Low Can You Really Go? " Inc.