In business, price reduction always seem like the perfect solution to every sales problem. It’s easy to assume that if we reduce price, sales will increase, or price reduction is a magical wand that will stop declining sales even if it doesn’t increase it. Many small business owners hold this wrong assumption, and it is partly responsible for low profits, low demand, and eventually the failure of their business. The assumption is built on the false belief that customers would buy a product if it’s cheaper. Customers do not buy products because they are cheap or more affordable. Customers buy products because they need or want them.
It’s easy to assume Walmart’s strength is low prices until you see the full picture. Walmart is known for low prices, but no customer will buy low-priced rubbish, horrible shopping experience, and things they don’t really want. Beyond low prices, Walmart has a great return policy (no questions asked returns), their locations are to their customers, large shopping halls, wide range of products customers love and need, large parking space, greeters at their entry and exit, large online store, in-store banks, good temperature in-store, well arranged shelves that make products easy to find, self checkout for customers that don’t really want human contact, cash back with zero charges, in some cases; spas and fast foods within their shopping halls, employees that are happy to help when you get lost, Walmart Pay and so much more. It is totally naive to reduce Walmart to just low prices, remove the numerous value they give customers, and make price even lower, you’d be stunned how fast customers will stop patronizing the retail giant.
In cases where they couldn’t deliver on low prices, their customer size did not decline. As the price of eggs skyrocketed in early 2023 in the United States, customers continued to patronize them. There are many items that are cheaper in other stores, but because of the numerous value Walmart promises, customers still choose Walmart. The customer isn’t focused on low prices. A lot of small business owners wrongly assume that they need to be able to serve the very poor and make them customers. When people are low on cash, they need help and support. They don’t need a product to pay for. People in bad debt, housing crisis, health crisis and all types of crisis that affects their finances aren’t looking for products they can pay for; they are searching for great products they don’t have to pay for. This is why food banks and many great non-profits exist. A business can’t be built around people who are low on cash and have no money.
A customer is a person who has strong willingness to buy your product and has the ability to pay with cash or credit. Businesses can and should always support the very poor but not by selling products to them. The very poor aren’t in the financial state to pay for a lot. So food drives and essential giveaway is always a good way to support the very poor. However, the core of a business should be built around paying customers. This is why companies like Apple Inc are able to prosper and remain profitable. They focus on customers who can afford their service. Profitability is a key part of business. You either chose to make a profit or make losses. It’s a brutal fact. There’s no middle ground. Non-profits do not make a profit. A business thrives only when it’s profitable.
Low prices as a core business strategy is proof that the business owner and team haven’t understood who their paying customers are. The price war never ends well. It’s a red ocean where no one wins. As businesses try to win each other with who has the lowest price, customers win in the short run. However, the businesses die eventually because they become unprofitable. How low can your prices really go, and when is the time to say “NO” to the temptation of low prices? The trick is to never fall into this trap. Rather than making low prices your business strategy, focus on how much utility customers get from doing business with you. In the end, whether you’re an airline or retail store, the greatest determination of price should be the customers you decide to focus on. Cheaper airlines focus on customers within an income range. They do not expect millionaires to fly them. It’s the income of their customers that determine their price, not the price moves of their competitors. No matter how cheap a flight ticket is, if you or someone you know almost crashed on the flight, that would be your last time of being their customer. Clearly, airlines sell safety not low prices.