There will always be competitors who undercut you on price. Matching them is usually foolish. You will lose money and the few customers you attract by doing so are generally not worth your time and effort.
This article will look at why you do not want to compete on price. Bear in mind, however, that these are broad generalizations. While usually true, there will be exceptions. You will need to find out what works and what doesn’t in your own market and with your specific customers.
Why discounting seldom works
An accountant once told a dive retailer he was losing money on most of the items he sold. “That’s okay,” the retailer replied. “I make it up in volume.” That’s not as funny as it sounds.
You undoubtedly have a good feel for the gross margins on each item you sell. If you buy an item for $50 and sell it for $100, your gross margin is 50 percent (a 100 percent markup).
What you really need to be concerned with are your net margins. That’s how much money is left after each item pays its share of your rent, utilities, insurance, salaries and other overhead. This is seldom more than 15 percent and often as little as 5 percent or less.
But let’s say, for the sake of argument, you have an item on which you make a net profit of 20 percent. Unfortunately, you have a competitor who sells the same item for 10 percent less than you do. What happens if you match this competitor on price?
- Your net profit drops from 20 percent to 10.
- This means you must sell twice as many items to break even.
Do you really think dropping your price by ten percent will double your sales? If so, we have some waterfront property in the Everglades that might interest you.
Some customers aren’t worth it
A store we work with once tried marketing their Open Water Diver courses at discount through Groupon. Understand that Groupon customers can differ substantially from the people who typically enroll in diver training.
- Most students who enroll in entry-level diver training first decide to become certified divers. They then research what is involved and when and where they can make it happen.
- Many — if not most — Groupon customers have not given any thought to getting certified until they see it listed among Groupon’s offerings. “This sounds like fun. And, at this price, what have I got to lose?”
This type of customer frequently has unrealistic expectations and is unwilling to invest the time and effort needed. What our store discovered was that most of these customers:
- Do not make further purchases.
- Are generally unpleasant and argumentative.
- Are overly demanding and impossible to please.
Additionally, these customers often try to hold your business hostage. They want you to go out of your way to accommodate them or they will obliterate you with bad social media reviews.
Apparently, these behaviors are not limited to Groupon customers. Most of the stores we talk to report similar experiences with any customer motivated solely by price.
The bottom line is that this sort of customer is not worth your time and effort. You won’t make money off them but you may easily lose money.
And sometimes…
Just because one of your current customers is lured away by a competitor’s lower price does not mean they are lost forever. As Benjamin Franklin said (and Aldo Gucci repeated), “The bitterness of poor quality is remembered well after the sweetness of low price has faded from memory.”
The link below will take you to a first-hand account by a couple who were seduced by a competitor’s promise of saving $200 on an Advanced Open Water course. In the end, they wound up paying a lot more and getting substantially less. As a result, they returned to their original dive store more loyal than ever.
This, by the way, is not a made-up example. It really happened to a couple earlier this year. You may want to share this link with your customers. It could not only save them money but a lot of frustration as well.
Kary McNeal III of Aquatic Ventures not only suggested this article but contributed substantially to it.