Tempted to lower your prices?

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Tempted to lower your prices?

Under normal trading conditions – pre-COVID-19 disruption – every time we sell our goods or services each sale requires that we cover three categories:

  1. The direct costs of the sale (for example, the raw materials purchased to produce the item sold),
  2. A proportion of the fixed costs that facilitated the production of the goods or services sold (for example, rent of office or factory space),
  3. And finally, a contribution to your profits.

If the demand for your business' products and services has remained the same, or even increased during the coronavirus disruption, you are in the fortunate position that its very much business as normal.

However, if demand has dropped or stopped completely – consider the fate of driving instructors for example – you may be left with a stock of raw materials or finished goods and be locked-in to various fixed costs that you cannot cancel (rent of premises).

If you have had to close down your business due to the lock-down regulation, there may be little you can do other than to claim whatever grants or other government support that is available and wait for the present restrictions to be eased.

If you have some flexibility to continue trading, all-be-it at a reduced level of activity, could you consider reducing your prices and what effect would this likely have on your finances?

Based on the three categories listed above here is a rough and ready list of reductions and their consequences:

  • If you reduce your price so you are still covering the direct costs and a contribution to fixed costs, but no profit, the sale will convert stock to cash, and you will mark-time from a profit point of view.
  • If you reduce your price so you only recover the direct costs the sale will make no contribution to fixed costs or profit. A sale on this basis will likely create a loss.
  • If you reduce your price so you only part-recover the direct costs and no fixed costs or profit, you will increase the loss on the sale.

If you do decide to reduce prices, stress that this a contribution you are making to help your customers during this difficult trading period. At least then, your apparent loss on the sale will help you build goodwill.

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