OFFERING a low price for your product or service in the marketplace is not always the wisest way to compete.

In fact, it may even kill your business as competitors with bigger buying power could easily charge less than your small growing business. If they start a price war there’s little chance that you as a smaller business will survive.

Sales consultant Bill Gibson of Knowledge Brokers International says business owners need to stick to the basic principles and factor margins into their pricing.

Margins are not introduced just to make a profit, but could be:

• To allow for error and unforeseen instances – such as a change in government policy.

• To allow for a competitive entry into the marketplace if you’re the first to introduce the product or service. This will allow you to later drop your prices and so gain an advantage over your competitors in the industry.

But to encourage customers to buy, you could also price your product at, or below cost price and make up the lost profit on add-on products or services. This is called loss leadership pricing.

An example would be a furniture retailer that sells a certain table at below cost price, but marks up its prices on an associated product like chairs.

You could then have in-store posters reminding customers about the special you’re running on the add-on products. This is called “clipboard selling”.

But Gibson says you need to be careful that you don’t mark up prices on other unrelated goods, which would leave customers confused as to how you arrived at these prices.

When it comes to discounting prices, Gibson says business owners should only grant a discount if they have clear reasons to do so, such as discounts on volume purchases, to close a deal or on upfront cash payments.

He says when pricing products, you should also consider things such as:

• Packaging – which can add value to a product to the extent that customers will be willing to pay more for the product.

• Match-selling – where you give a customer who buys items that go together a discount.

• Full price selling – where such things as Value-added Tax (VAT), transport or petrol costs are all factored in.

Paul Netto (pictured above) who runs Tinta Paints, a paint manufacturing and distribution business, says discounting your product to move more stock won’t necessarily increase your bottom line.

“Nine times out of 10 you’re doing yourself an injustice by discounting,” explains Netto, who learned the hard way when he discounted his paint prices by 20% in order to sell more products. He ended up doubling his sales, but his gross profit only increased by a mere four percent.

The answer, he says, lies in rather adding more value to the product you are selling. He does this by guaranteeing the customer a consistent product and by offering them a good service.

He also markets his product inside his customers’ stores by supplying them with colour charts of his paints.

Netto says when he first secured an agreement with a local hardware chain a few years ago, he discounted his paint for them to below cost price.

After a year, he informed the hardware chain that he was pushing up his price by 12%. This was above the eight percent increase that other manufacturers were offering.

But he told the client openly and upfront that he would go out of business if he increased the price by any less.

By then he had built up such a good relationship with the client that they readily agreed to the price increase.

Contact Gibson on 011 784 1720 and Netto on 011 622 4852.