Why Low Pricing May Be Killing Sales

Special Offer Why Low Pricing May Be Killing Sales

Low pricing is generally used to increase sales, which can sometimes increase revenue if the demand elasticity was high for the higher price. By reducing the price, the positive effect of sales can be greater than the negative effects of the drop in price, resulting in a net increase in revenue.

However, beyond supply and demand, there are other factors that influence sales.

Money is virtually the universal method of communicating value, and the overall price of goods is largely affected by supply and demand. While inflation does play a role in the actual number amount, it has little effect on the value communicated by that amount since all prices remain relatively consistent compared to each other. This means that a car will almost always be significantly more expensive than a gallon of milk, despite the effects of inflation.

Low Pricing and Value

Since the value of an item is largely determined by supply and demand, if a product is priced below this market-determined value, it typically communicates lower quality. This is the reason why low pricing may be killing sales.

Would you buy a brand new computer for $50 that is normally priced at $2,000? Without any additional information, we would all assume that this computer was significantly lower quality, broken, or that there was some other way in which we would end up paying. "What's the catch?"

Likewise, if you consider ebooks, consumers generally assume that ebooks priced at $0.99 are lower quality than ones that are priced $9.99. However, consumers are also more willing to spend $0.99 on an ebook if they know nothing about the author or the quality. Nevertheless, many consumers would rather spend more money on something that has more perceived value.

How to Win at Pricing to Maximize Revenue

The goal when setting a price should be to maximize revenue. You can sell your product for $20, but if you only make 100 sales (20 x 100 = $2,000), you would be better off selling for $15 and making 500 sales (15 x 500 = $7,500).

Since the market largely determines the price through the effects of supply and demand, finding the right price to start with is as simple as finding out which products resemble yours. Ask yourself: What needs or wants is my product satisfying that other products also satisfy?

Then, from that point you have to decide which direction to go: up or down.

Pricing High vs Pricing Low

Companies who price their products higher are able to do so because they have prestige and a reputation for high quality. However, for a company with little-to-no reputation, pricing lower may be a way to increase sales. Just be careful not to price too low.

There is a sweet spot where revenue can be maximized based on both the consumers' perceived value and the demand elasticity of the product. However, eventually revenue will begin to decrease as a reduced price has little effect on the demand. Eventually, a highly reduced price can actually negatively impact consumer demand.

Long-term low pricing of a prestige brand can actually damage the brand. Imagine if Apple sold all its computers for $50. We might think that would be great, but it is difficult to separate the connection between the price and value. Apple would likely be perceived as cheap and low-quality eventually, just as many other less-known tech companies are perceived who sell high-quality computers and tablets for a low price.

Article: Creating a Successful Online Sales Funnel

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