My first instinct is that you should not lower your price. Many companies want to lower price thinking they can win more market share. Rarely does this work out well. If you lower your price to win share, what will your competitor do? Probably lower price too. In the end, you won’t gain market share. Instead, you’ll simply reduce profits for both you and your competitor.
Yet, sometimes it makes sense to lower price.
When your competitor lowers their price you probably need to respond, but respond thoughtfully. After all, if you’re using value-based pricing, you’ve set your price to be some amount higher or lower than your competitor’s in order to capture the differential value. If they lower their price, you will need to lower yours to keep the same relative price position. It’s all about how your customers decide between your product and your competitor’s product.
This is a great time to think through your price segmentation. Is it possible to lower your price only on the segment that your competitor serves while not lowering your price on your other segments? This is what the big airlines did when Southwest started flying their routes. They lowered their prices on coach seats, but not on first class. After all, Southwest didn’t offer first-class service.
When you come out with the next-generation product, you may want to lower your price on the older generation. This is a great price-segmentation technique that enables you to sell to price-sensitive shoppers who wouldn’t pay your higher prices, but would pay a lower price for a good enough solution. Buyers who like your newest technology will pay your higher price. This is essentially what happens when a paperback book is released. It’s an attempt to capture those customers who wouldn’t pay a higher price for the hardcover version.
If you have excess inventory, especially of a perishable product (like an airplane seat), you may want to lower your price to sell out that inventory. However, be careful here. Every price move trains your customers on what to expect in the future. If your customers are used to discounted prices at the last minute, they are motivated to wait to purchase until the price drops. Use this sparingly.
Set your price based on what people are willing to pay for your product. Remember, if your costs go down, it doesn’t change their willingness to pay. It’s possible your competitor’s costs also go down and they decide to lower their price. In this case, refer to the previous paragraph about responding to a competitor who lowers their price. But be clear that you’re not lowering the price because your costs went down.
Yes, sometimes reducing your price is the best decision. But always explain why you are lowering it. And in most cases, the answer is … don’t.