It’ll come as no surprise that my first instinct is to encourage you to never lower your prices. Many people want to lower their prices to gain a greater share of the market, but rarely does this work well. Think about it: if you lower your price, what do you think your competitors will do? They’ll likely lower theirs, too. In the end, you won’t gain market share – you’ll just reduce profits for both you and your competitor.
In saying that, there are rare times when it makes sense to lower your price.
If your competitor lowers their prices, you should respond – but thoughtfully. After all, if you’re using value-based pricing (which you definitely should be!), you’ve set your price to be relative to your competitors, in order to capture the differential value. If they lower their prices, you may need to lower yours to keep the same relative price position. This is done with how your customers decide between your product, and your competitor’s, in mind.
This is also a good time to think about your price segmentation. It may be possible for you to lower your prices only on one segment (where your competitor also serves), and keep your prices on the other segments stable. This is what major airlines did when Southwest started flying. They lowered their prices on coach seats, but not on first class – since Southwest doesn’t offer first-class seats.
Another great price segmentation technique is to lower the price of an original product, when you release the next-generation version of the product. This way you can sell to shoppers who are price-sensitive who won’t pay high prices, but would still pay a lower price for a solution that’s ‘good enough’. The buyers who like and value the latest technology will pay the higher price. This is also what happens when a paperback book is released: it’s an attempt to sell to customers who won’t buy the hardcover edition.
Another scenario where you may want to lower your price, is if you have excess inventory (especially if it’s a perishable product, like an airplane seat). You can lower your prices, but be careful: every price move you make teaches your customers what to expect from you in future. If your customers become used to discounts being offered at the last minute, then they’ll simply wait to purchase when the price drops. This tactic should be used sparingly, if at all.
Ultimately, you should set your prices based on what people are willing to pay for your product. Keep in mind that if your costs decrease, this doesn’t change how much your customers are willing to pay. It’s certainly possible for your competitors to lower their prices if their costs go down; in this case, be mindful of how you respond (and refer to the earlier paragraph on how to respond). If you do lower your prices, be certain that it’s not because your costs went down. Yes – there are times when reducing your prices is the right decision. But you should always be able to explain why you’re lowering it.
In the end, most cases call for my favorite answer to the question of whether to lower your prices: don’t.