The impact of COVID-19 will go well beyond the pandemic itself, with serious effects expected on the global economy as well as on people's lives. During periods of economic downturn, people's incomes are limited, and their spending habits change significantly. To stay afloat and retain customers, some businesses will choose to revise their prices and fees downwards. Naturally, with the stiff competition that characterizes many markets, you may be tempted to follow suit. Even as you strive to make the right decisions for your business and customers, it would be important to understand the visible and hidden negative effects of lowering prices.
The negative effects of lowering prices
The negative effects of lowering prices can be categorized into visible and hidden outcomes. The visible effects related to profits and sales volumes. While a good number of business owners think that lowering prices will help to drive sales, the move can lower your profits by a significant margin. Reduced profitability will have a huge negative impact, particularly on startups and small businesses. For any business to enjoy the same level of profitability after lowering prices, they will need to sell more products to customers. In a shrinking economy, it may be difficult to sell more than you used to do previously.
Apart from the visible effects, the hidden ones can have a huge impact on your business. Cutting your prices may lead customers to believe that they will get lower quality from you. This notion could affect your reputation as a business that sells high-quality products or services. Another possible outcome is that long-term customers will feel that you have been overcharging them, a factor that could see you lose some of your current customers. In addition, customers who feel that they overpaid will not refer others to your business. You may also not end up attracting more new customers if your competition lowers their prices as well since things will still be the same.
With these effects, adjusting your prices downwards could be counterproductive, effectively dealing a blow to your efforts to drum up business. As such, lowering prices during a recession would not be a smart strategy.
What you should consider doing
To help you get through the tough times, there are several steps that you can consider taking. With declining demand, you will need to come up with smart and innovative ways of keeping your business going. If you only handled big projects in the past, it would be time to consider taking on smaller projects with smaller budgets. Taking on smaller projects will not only keep you going but could also earn you new customers. Another option would be to provide free consultations while maintaining the prices of your products and services at the same level. Since the price is defined by the value that customers enjoy, you can also choose to increase price and value simultaneously. However, this will require that you pick the right time and decide how much to change the prices. In the end, you will want to make changes while ensuring you encounter the least resistance from your customers.
In the long run, the pandemic will ease off, and the global economy will rebound. However, adjusting prices can have long-term effects that will take a long time to rectify. Provided you deliver value to your customers, we recommend that you charge what you believe is a fair price.