The fallacy of price cuts

Too many business owners believe that the easiest way to boost sales (and make more money) is to trim back their prices. Their theory is that a more attractive price will bring in more potential customers. The problem is that cutting sales price has too dramatic an effect on the additional volume needed to make up for that price cut.

Assume that you make $10,000 in profit from a product that costs $10. You normally sell that product for $20, and therefore need to sell 1000 units to make $10,000.

$20(sale price) – $10(cost) = $10 gross profit X 1000 units = $10,000 gross profit.

Suppose you cut the sale price by 5%, or $1.00. Now you need to sell 1,111 units to make the same $10,000 profit.

Cut prices by 10% and unit sales need to be 1,250.

Slash prices 25% (because that sounds pretty good in an ad) and you need to sell 2,000 units.

Will you really sell twice as many units of that product because the price is cut by 25%? Doubtful.

Don’t get suckered into cutting your prices to help increase sales, your business treadmill will need to spin even faster than it is now. The other problem is that sale prices tend to bring out price shoppers, or vultures, or whatever you want to call them. Don’t get me wrong, they have their place in the business world, especially if you need to unload some dated product. But don’t confuse them with loyal customers.