Businesses must take care when deciding to lower prices or offer discounts. Here are some strategies for lowering prices without hurting profits or the brand.

Many experts caution small business owners from cutting prices to generate revenue or increase market share with or without a recession. Sometimes, however, it is inevitable — especially if all other options, such as perks or improved service, have been exhausted. According to a February survey by the National Federation of Independent Business, almost 30 percent of small business owners said they’ve lowered their prices.

Deciding to make a price cut is no easy task, though, as price cuts tend to raise some difficult questions, like, “Will the discounts cheapen the brand?” “Can you raise prices again” “Will you make enough revenue to generate profit?”

But if you do decide to cut prices, don’t do it all at once or slash prices across the board, suggests John Quelch, professor of marketing at Harvard Business School. “Instead, trim prices on specific products or services — those that are slow moving or have higher margins.” (Source: BusinessWeek)

Consider these other price-cutting strategies, as well.

Slim Down Product and Service Offerings
Reducing product and service offerings can help attract new customers and keep existing products and services at full price, Randy Myers, contributing editor for CFO and Corporate Board Member magazines, writes on MSN Business on Main. For example, last year McDonald’s raised the price of its double cheeseburger from $1 to $1.19. However, it also made a similar but cheaper-to-prepare burger that allowed the fast-food chain to sell “to value-conscious consumers while still selling its double cheeseburger at a reasonable profit,” Myers explains.

Getting clients to purchase based on a slimmed-down service also gives the business an opportunity to sell the client other items or services once they’re in the door, the Wall Street Journal adds (subscription required).

Bundling Products and Services
“Bundling more services for the same price can be an effective way to be more competitive without cutting deeply into profits,” Inc. Magazine says.

That’s what GotVMail (now Grasshopper), a company offering virtual phone systems, did to get 40 percent more sign-ups. The company increased the number of minutes offered and included features customers used to pay extra for into existing plans. Despite shrinking its margins by bundling, the company is still profitable, according to Inc. Magazine.

Offer Multiple Price Points
Experts recommend picking certain products to discount while leaving a good portion at full price. Don’t alienate customers who still want to buy luxury items, the Journal warns. “It’s entirely possible to offer discounts to price-sensitive customers while continuing to charge full freight to those willing to pay,” BusinessWeek says. Start by asking customers what they need, and for those who are price-sensitive, change your mix of offerings and emphasize the most affordable ones.

Small-business owners are also advised to consider making the discounts temporary by only offering them to first-time buyers, says Inc. Magazine, or putting a time limit on the sale, BusinessWeek adds. “Limited discounts can boost sales without branding the company as a discount seller,” Inc. Magazine notes.

Be Your Own Discount Seller
Instead of letting cheaper competitors take a piece of your market share, create your own discount brand, BusinessWeek advises. That’s what KarateDepot.com owners did when they redesigned MartialArtsSupplies.com, Myers says at MSN Business on Main. The owners focused their flagship site KarateDepot.com on the most profitable items while MartialArtsSupplies.com catered to the “recession shopper.” The latter Web site now accounts for 6.25 percent of the company’s revenue totals and the average profit per visitor has gone up 20 percent.

Offer Performance-Based Services
Appeal to customers interested in low upfront costs by offering performance-based pricing, wherein clients pay only if their goals are met or exceeded, the Journal suggests. Architecture marketing firm IWPR Group offered this incentive to clients and found that the drop in fees kept some clients from leaving, while other clients ended up paying even more than the former flat fee because IWPR exceeded their goals.

Small-business owners must remember that with this type of pricing strategy, the risks are almost all on them. Establish solid guidelines, stick to familiar industries, use strict definitions of success and try to control as many variables as possible to minimize risk, the Wall Street Journal says.

For more information on keeping your small business running, check out Key Targets for Small Business Success.

Resources

NFIB Small Business Economic Trends
by William C. Dunkelberg and Holly Wade
National Federation of Independent Business, April 2009

An Expert’s Guide to Discounting
by Teri Evans
BusinessWeek, April 3, 2009

Cut Prices Without Cutting Profits
by Randy Myers
MSN Business on Main

Smart Ways to Cut Prices
by Diana Ransom
The Wall Street Journal, April 22, 2009

Pricing: How Low Can You Really Go?
by Ryan McCarthy
Inc. Magazine, March 2009