Operating at minimal margins can be a successful strategy in some circumstances. If the downturn is a short one, the total losses may be absorbed into profitable trading before and/or after the tough times. Also, if the marginal trading is in non-core product lines that, for strategic reasons, are still desirable, again the loss-making sales can be subsidised by profits from core products.
Nevertheless, the flow-on from these pricing decisions affects all businesses directly or indirectly and a careful review of your pricing strategies is required to ensure your business does not become a victim of the current situation.
There are three main pricing strategies available to small businesses and (fortunately) they are not mutually exclusive.
The first and the easiest to establish is cost-plus pricing. In its simplest form, there are only two factors – the cost of the product and the “plus”. The cost is usually set by your suppliers but can be influenced by your negotiating skills and the volume of product being purchased.
The “plus” component is often problematical. This needs to cover all your fixed costs and (hopefully) a bit more for profit. When volumes are reduced, the extra added on to each item needs to be even higher and this is usually difficult to achieve. Careful control of costs is essential if this strategy is to succeed.
Value pricing sets the price according to the value to the customer. The theory is that a customer will be willing to pay more for a product that is essential to operations than another customer who is not as reliant on that same product. Clearly this is a difficult way to set a price and you still need to ensure that the value-price is at least the cost-plus price!
And then there is comparative pricing. If you know your cost price and the price your competitors actually charge, you can set your price at less than your competitors while making sure the price is sufficiently above your costs.
Whatever price you choose, you need to remember that your competitor may have a cost advantage and is still making a profit at (what seem to be) low relative prices. Back to the drawing board for you!
Suffering a slow business suicide is a painful exit plan. Avoid becoming collateral damage in the whirlpool created by misguided competitors by making informed decisions and formulating a sustainable future for your business.