Should I Cut Prices to Boost Sales?
Another take on the age-old question of whether a cabinet business should cut prices when sales are slow. August 12, 2007
Question
I'm challenged with this decision - whether to try to gain a larger market share by lowering my prices. Now that the housing market is in the toilet, I'm being given a chance to go after work that would never had returned a call to me in the past. Price is the name of the game right now. I am able to lower my price and still make money, but am I just driving down the market value of my product - not to mention some of the ethics involved in low balling work away from other people. In this challenging market, is it the right business decision for the survival of my company?
Forum Responses
(Business Forum)
From contributor A:
Best of luck. I would never suggest anything that would destroy the survival of your company. I am probably the wrong guy to jump in here and will likely get bashed but here goes my rant. I applaud your thinking regarding "driving down the market value of your product." The question becomes how low will you go? Anybody can test the bottom pretty easily. Remember that in our industry there is virtually no "barrier to entry." It seems that too many folks will run to Sears with a credit card and try to compete on price, and hey, if they make enough to buy the next cordless drill, it is a success. I mean the garage is rent free and my wife has the insurance, right? The point is that someone will always beat your price. And if it's a tract builder you are referring to (larger market; someone who never would have returned your call prior), remember that they will "whore it out" to the next cheaper guy if they can. I wish we had to get a license to do this. If we were honest about it, don't we wonder when we look at the electricians or plumbers on a jobsite (sorry for the stereotyping) and question how the heck they even spelled their name right on the test, or how they stay employed when their most frequent activity is holding up the truck and smoking? They aren't shy about billing out at $75-$95 an hour, and billing for 8 hours or better. I would mutate into a moose if they actually worked more than 4. Meanwhile, we're sitting here paying for literally hundreds of thousands in tools and software and fighting to bill out at $55. I can't say for sure, but I doubt they are slicing their rates.
Maybe you could look at other (re-model) markets or other products you would normally turn down. Keep the margin up. Or be honest with yourself financially and see if you can use the time to improve your process or try selling a little harder (OK a lot harder). If you drop your shorts just to trade dollars, I think it would be hard to rebound. I agree that it degrades the whole industry. And it seems that the guys that just sell on price eventually go down in flames anyway. I attend the auctions.
From the original questioner:
Let me add some details to my question, to be fair. We are a medium size, high volume company already. I can lower my prices and be the pimp daddy to "all the whores" as you put it. I can lower my prices as low as they can go. But why? Will it help me or hurt me in the end?
From contributor B:
You have some options to consider. If you drop your prices, you should offer a reason for it. Producing a builder grade of cabinets would reduce your costs and maintain your profit. You might be able to sell some cheaper builders unfinished cabinets for a discounted price and let their painter paint them. You could just lower your price but if you are too low then you get on a slippery slope. Be very careful when calculating applied overhead and material.
You can also sell factory made cabinets to supplement your custom jobs. You can actually make as much selling factory cabinets as you can by building them. There are many different grades of factory cabinets so choose your brand carefully. A cheap builder grade might just work for that type of customer.
From contributor C:
Don’t lower your prices, unless you know they are too high to begin with. If you are competitively priced, but need more, maybe you need to lower your overhead rather than your prices.
From contributor D:
Don't panic - look a back at last year and the year before. We had a slow winter also but are starting to boom now. I've gone through this many times and at first went out and bid jobs to get them instead of to make money. The jobs are 2 or 3 months out anyway and by that time you are swamped with low profit jobs - and too busy to make any money.
From contributor E:
Price, delivery, or quality - the client gets to choose any two. You get the third. This chance for more work at a lower price is a legitimate thing. It is also legitimate for you to say these three letters in exchange for lower prices. C.O.D. Not 10 days, not tomorrow, but on delivery. No new orders are placed in production until the last one is paid for. We are not banks. I am not a large shop but I do have, as we all have, clients who are penny-pinchers. These things have worked for me.
From contributor F:
My take:
1) When business is in the toilet, it never stays that way for long, as long as you have a good reputation, etc.
2) You are most profitable when you are close to but not at maximum capacity for your current facility, machinery, maximum number of people that can work efficiently in your shop. Excluding the times like now when you have to make a price concession, you should be making 15 - 20% profit at maximum capacity for a large shop, more for a small shop, though it is often the small shop making less.
3) If your orders have dropped away to the point of unprofitability, then dropping prices is ok, but I would do it just enough to bring in some extra work, and tell customers that this price drop probably won't be permanent. First I would make sure my sales effort is maxed out - that you are seeing as many people face-to-face as you and your sales people can. This will often reduce the need to make price concessions.
4) Lowballing your competition is never unethical unless you are doing it the Walmart/Dell way, which is to ignore your vendors' right to make a profit and your employees' right to lead normal, healthy lives.
5) If you can lower prices and still make a profit, then it doesn't sound like your business survival is an issue, though maximum profitability might suffer.
From contributor G:
I can contribute something from personal experience. When I bought my business 6 years ago (I had been working in it the previous 10) the one thing that frightened me was the prospect of not having enough work. I did everything possible to assure we had a full calendar because I inherited a serious overhead and 35 people who were depending on me. When I bid a job I cut every bit of fat out of my estimate and I didn't dare add an extra point of markup. I did this for four years and while three out of four of these were reasonably profitable, the whole mindset was bothering me. I looked at bid results and the jobs I was getting were not the result of being low bid - they were relationship based and based on my capabilities. And the jobs I was losing I was losing by margins so huge that I could have left all my overhead and profit on the table and still not been low. The other thing I noticed was that of these jobs I lost by huge margins. At least three or four would come back to me each year when the low guy failed to show up.
So I raised my prices, steadily and significantly, up 30% over two years. The result has been and increase in sales of about 50% and also a significant increase in profitability. Among other reasons, a lot of the jobs I shouldn't have bid or shouldn't have gotten in earlier years have gone away. And I have enough money in every project to provide the service and quality that keep them coming back. This is an easier course to take in a strong market but it has worked well for me.
From contributor F:
To contributor G: It really peeved me that a consultant in one of our recent industry periodicals says that raising prices is the last thing you do. He gives a list of other things to do to control costs, but most people have been working on that every day of their career, so for many, it IS time to raise prices RIGHT NOW. Lowering prices is like whoring, and is about as satisfying. It is a total myth that raising prices will drive away business. That is a totally different situation than lowering prices to rapidly increase market share, since existing customers rely on you, but new customers mainly want to know your price competitiveness. What do you get with rapidly increasing market share -bad accounts that can take years to get rid of or get paid.
From the original questioner:
Let me narrow down the discussion. I do not want to lower my prices, but to increase my business or even stay at the same level I feel it’s my only choice. I need more work now. In my market, you live and die based on price. To raise prices at this time would be business suicide. With a correction in pricing in the housing market I feel everyone involved takes a hit. I feel my costs play no factor in my pricing at this time, it’s all market driven. I'm lucky I can control a little of my market and pick up a ton more good work, but at a lower price.
From contributor H:
If you have placed yourself in a commodity market then pricing is it. If you have differentiated yourself so the competition is very limited then you are not selling on price but something else. We made the mistake of trying to sell on price, didn't make a decent return. We sat down to see what we could do to improve our margins. Better design, improved customer awareness of what we had to offer, always on time, fix it without charge if something wasn't right even after the warrantee period, get referrals aggressively. Even on some bid work we end up getting the job when we are not the lowballer. We also have been working on improving our productivity. Define waste as anything the customer doesn't want to pay for, reduce or eliminate it. We track our productivity by "value added/employee" not gross $/employee. Depending on your amount of buy-out the latter can be very misleading.
