September 30, 2010

Lower Prices, Lower Sales!

Pricing Bell Curve
Last night on a conference call with California we were discussing pricing and the relative impact it has on units sold. The fallacy that many food entrepreneurs incorrectly believe is “lowering prices will increase volume” and fix any financial woes that abound. If you are mid-market with leaders in your category and you lower prices, your item will actually suffer a loss in units sold. As you lower beyond a certain point, some customers will drop away for various reasons including the expectation that the product is now inferior due to the lower than market price.
The chart helps illustrate another important point for smaller companies in a competitive market. If the midpoint (B.) is occupied with a much larger and entrenched food company, you have a choice of selling a lower volume in the higher price point area (A.) or the same volume of units at a much lower price point (C.). I encourage you to sell at the higher, more profitable price point (A.) and use the additional gross margins to help you compete with the other food companies. For many it comes at a surprise that the unit movement is the same in sections (A.) and (C.)
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