Horizon Featured Article

Understanding Price Reductions & Using Them to Your Advantage

Northsail Knows the Importance of Tactical Pricing Strategies

As a custom software developer, Northsail has dealt with countless clients that are looking to create solutions to the daily obstacles their businesses face. Our commitment to providing these types of problem-solving tools on-time, on-budget and on-spec means that our team does a lot of pre-planning, and we absolutely have to be organized.

We're so adamant about creating positive, long-term relationships with our clients that we'll actually turn down jobs, if we don't think we can meet and exceed our clients' expectations.

Some businesses don't understand the importance of this type of forward thinking and strategizing, but any successful entrepreneur will tell you, organization and planning ahead are the cornerstones of building a stable, scalable and profitable business model.

These elements are critically important. They encompass a lot more facets of your business than simply arranging contests and promotions, or designing your marketing materials to be appealing for your customers. If your long-term plan involves growth for your operation, you'll need intelligent pricing strategies in place to protect your KPI.

With that in mind, we've put together some information on different types of price reductions you can use in your pricing strategies. You can use these, not just for the purpose of undercutting your competition, but in strategic ways that will allow you to increase sell-through on slow moving products, and reduce inventory that you’ve been holding onto for months or years at a time.

What is a 'Promotion'?

When you think of a 'Call to Action', what comes to mind?

Now that so much business is done online through ecommerce, a lot of people might think of the typical 'Buy Now' or 'Click to Enter' buttons you can find on some websites that are designed to drive conversions.

However, there are other types of things you can do to push your product. Promotions and contests are a great opportunity to do this, especially if you're smart about how you frame these types of events.

Contests Enforce Customer Engagement

Giveaways or price reductions typically have three major purposes: to drive foot traffic (both in-store and online), lower the customer's hesitation to spend and to help maintain your inventory at optimal levels.

For contests, coming up with a great contest prize idea is a good place to start these pricing strategies. There are tons of amazing ideas out there, and you can check out some of our favorites in our Contest Prize Ideas article. Contests are an effective way to increase foot traffic. Everyone loves getting something for free, right?

Promotions Promote Inventory Control

Promotions are a different kind of beast, but no less impactful. Offering promotional pricing is an easy way to reduce any hesitation the customer has about making the purchase. They can more easily justify taking action, because they're getting the product at a reduced cost.

By the same token, if you use slow-moving or overstocked inventory in your promotions, you can turn this to your advantage by using a promotion to clear out products that otherwise sit on shelves and aren't bringing in any revenue at all.

Together, these tactics allow you to liquidate inventory that didn't sell the way you expected, and gives you the opportunity to at least break even on their costs; rather than holding them indefinitely and taking it as a loss.

If you're looking for some clever design ideas for in-store promotions, you can check out our article HERE.

What is a 'Discount'?

Many people make the mistake of thinking that any pricing reduction strategies could be considered a discount. In reality, that's actually not true.

Discounts can actually have two definitions, which are quite different from one another and can be utilized differently.

Imperfect Doesn't Mean Worthless

The first type of discount refers to products that aren't quite up to your business' standards. Damaged products, display models, stale products or discontinued items are great examples of these types of 'lower quality' sale items.

In some cases, business owners don't even try to sell these products. They take them at a loss and write them into their expenses, but this isn't an effective long-term plan for making use of these types of products. Eventually, utilizing that strategy will start to seriously impact your bottom line, and every inventory or ordering mistake becomes another nail in your business’ coffin.

You might be surprised by how many customers would gladly buy a product with damaged packaging or floor models that have been pawed over by countless other customers, even at discounts as low as 10%-25%.

Everyone is always looking for a good deal, and most retail industries have a substantial portion of their market segment that would be glad to take those products off your hands; at a reduced cost, of course. So, consider trying this kind of tactic, before forfeiting your entire ROI and using write-offs as your easy answer.

Get to Know Your Customers

The second type of discount pricing strategies you can use involve providing certain parts of your preferred market segment with custom-tailored price reductions.

This might sound more complicated in theory than it actually is to execute. For example, do you have certain products or services that you're offering, which appeals to a very specific demographic? If you're a store that sells cream for aches and pains, have you noticed that most of the customers buying those products are seniors? If you're a store that sells comic books, do you notice kids are the ones most often buying the books?

These might seem like predictable demographics, but that's because they are. Your business may not have such predictable demographics that are buying products, but that's why it's so important to monitor your sales statistics and promote strong interactions with your customers. Let them show you themselves what they find most appealing. What you learn might surprise you.

Using the examples we just discussed, the business selling cream for aches and pains could do well by introducing a senior's discount on certain products, or during a certain day of the week. The store selling comics could improve customer engagement by designing a reward's program for students, such as a discount for maintaining good grades (this will also make you popular with their parents).

These types of discounts tend to be somewhat narrow, but they can create an incredible amount of excitement for those who are eligible to take part, which will encourage deeper loyalty from those customers as well.

What is a 'Markdown'?

Traditionally, a markdown is the type of price reduction that consumers think of when they're imagining finding a 'deal' somewhere.

Like promotions, these pricing strategies are a great way to get slow-moving inventory out the door without eating the cost or holding it indefinitely. It's also a wonderful way to help manage purchasing errors, such as new products that you thought would appeal to your customers but are just sitting on the shelves gaining dust.

It's Possible to Have Too Much of a Good Thing

For some businesses, these are the only types of pricing strategies that they use, but that can actually be detrimental to them in the long run. It's impossible to remain profitable and maintain a scalable expansion plan when you're constantly taking a hit to your profit margins, just to get customers through the door.

In fact, leaning too heavily on this type of promotion can lead to price wars with competition, which typically ends badly for everyone; except the customers.

However, using thoughtful, well-planned markdowns is a great way to draw foot traffic, while also controlling inventory levels. It's a fine line to tread, but effective when it's done well.

Also, markdowns are a smart way to trial new products on customers. Introducing new products at a markdown price will encourage some customers to try them out, even if they normally wouldn't have. And then, if the feedback from customers is positive, you can restock the product later at a higher profit margin.

Pricing Strategies are Only Part of the Equation

Of course, there's a lot more that goes into designing an overall plan for managing your business than using price reductions, but the sooner that you start to use strategic, intelligent pricing strategies, the sooner you'll be able to take control of your business' profitability and your inventory management.

These are problems that plague countless businesses; especially new business owners, who are still learning the ropes. At Northsail, we’re experts in problem-solving, and we make it our business to help you find solutions to your daily obstacles.

Pricing Strategies are Only Part of the Equation

Of course, there's a lot more that goes into designing an overall plan for managing your business than using price reductions, but the sooner that you start to use strategic, intelligent pricing strategies, the sooner you'll be able to take control of your business' profitability and your inventory management.

These are problems that plague countless businesses; especially new business owners, who are still learning the ropes. At Northsail, we’re experts in problem-solving, and we make it our business to help you find solutions to your daily obstacles.

Problem Solving is What Northsail is All About

If you've got software problems that need solutions, you've come to the right place. Northsail specializes in providing business owners with the tools and services they need to be successful in their day-to-day practices.

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