HomeFreebie IndexPrice Wars, Not a Winning Strategy

Price Wars, Not a Winning Strategy

     All of us know that people shop at stores that sell products for better prices than their competitors do. Still, this doesn't mean offering lower prices is profitable.

Variations in Profits

     First, let me introduce you to the factors of profits and their effects, as published in PRESIDENT NEXT Vol. 14.

When

price

volatile cost[1]

sales volume

When fixed cost[2]

changes 10%,
profit will change

150%

120%

30%

20%

  • [1] Costs associated with selling an individual product (i.e., credit card processing fees or the wholesale costs of products)
  • [2] Costs that are fixed regardless of sales volume (i.e., website hosting fees)

Volume-Oriented

     One of the most common plans for increasing profits is to increase sales volume by offering competitive prices. Let's see how profitable such a plan is by doing a simple simulation based on the above numbers. When you reduce the prices of products by 10%, you will lose 150% of your profit. But, you can also expect an increased sales volume because of the new, lower prices. Just to recover lost profits, you need to increase your sales volume by 50%[3]. On top of that, the costs of these sales will increase as your sales volume increases (i.e., you will have to hire extra staff to handle increased orders). So, in the end, you are making less profit, even after a 50% increase in sales volume.

  • [3] As sales volume increases 10%, profits will increase 30%. To increase your profits by 150%, the volume needs to be increased by 50% (150% ÷ 30% x 10%).

Price-Oriented

     One realistic way of increasing your profits is to increase the price of your products. With this strategy, most business owners worry about decreasing their sales volume. In a real-world situation, the volume will most definitely decrease, but that's okay. Let's do the simulation again. When the price is increased by 10%, profits will increase 150%, so even after sales volume decreases by 50%, you will be making the same profit as before [4]. Unlike big names, mom-and-pop businesses have limited sales power; you won't be able to make money by messing with your sales volume. Try selling your products at higher prices by wisely using the illusion of monetary value, as described in the "What is Money issue.

  • [4] Like [3], if you lose 150% of your profits, your sales volume will have decreased by 50% (150% ÷ 30% x 10%).

© January, 2017