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Should You Cut Prices in a Bad Economy?

I received an e-mail recently from a telecommunications company touting how they are cutting prices to help small businesses struggling in the current economy.

Now, I’ve covered business long enough to know that few, if any, business owners change their operating strategies just to help others. So I e-mailed back to ask:

“Isn’t the company lowering prices to help boost its customer base?”

The spokesperson for GotVMail, a virtual PBX (private branch exchange), wrote back:

“Yes. But we also recognize that small business owners are trying to squeeze every last dollar out of their outsourced
technology solutions.”

Fair enough.

Still, I wondered, should small business owners be cutting prices for goods and services in a bad economy?

I asked pricing guru Mark Burton, coauthor of Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table”, what he thought about the pricing strategy.

“I have a lot of concerns about doing this across the board,” he said. “You’re not running a charitable organization.”

Burton points to a newspaper he worked with in the 1980s that reduced ad rates in order to help department stores that were struggling during tough economic times. When the economy eventually turned around, the department store operators dug in their heels when the newspaper tried to push through price increases and refused to pay for the hike, he explained.

“If you think cutting prices earns you goodwill, you have to be careful about that,” Burton said. “Some customers have short memories.”

The best approach, he advises, is creating a new tier of products and services—one that offers customers less expensive options with fewer bells and whistles. That way, you don’t cannibalize your existing offerings.

In Burton’s own consulting business, Holden Advisors, he offers a low-cost option as a fallback during negotiations, if needed. It’s all to encourage a fair give and take because, he notes, “we recognize budgets are constrained right now.”

Siamak Taghaddos, the CEO of GotVMail, a company with 50 employees, has a different take. He believes it all depends on what you’re selling.

“Cutting prices alone may start commoditizing some products and devalue others, which can lead to challenges when the economy turns around,” he said. “For us, increasing the value of our service is beneficial to both us and our customers regardless in both a bad and good economy.”

Business has been hurt lately for GotVMail, especially among financial customers.

“In the last two weeks, there has been a decrease of financial customers and over the last six months, mortgage brokers,” said Taghaddos.

The way he sees it, “we didn’t just cut prices, we increased the value of our plans. As entrepreneurs ourselves, we place more importance on value than just cost.”

It all comes down “happier customers”, he adds.

What’s your take? Is it a good idea to cut costs when the economy is sinking?