I have a confession to make. When I started selling online, my business strategy was to undercut all my competition. That was a stupid move. I accepted low margins but sold a lot of product. However, within months, my competition was matching my prices and my market share fell. To this day, on that web site, I have low margins with no hope of ever getting them raised.
Price cutting is the #1 differentiation strategy used by unsophisticated online retailers. It is also the easiest, and normally, the worst strategy you can do.
To this day, we deal with distributors who try to start price wars with us on our own products. Talk about stupid. Since we are selling them the product in the first place at a substantial profit, how can they possibly think they can win a price war with us? We immediately cut off distributors who can't figure this out--we don't want them or need them.
Of course, even large companies make this mistake. I can think of many companies such as Overstock who have yet to make a profit by discounting. To be honest, it could work in certain situations. Amazon is the king of online discounting, and after losing billions for a few years, it started working for them. If you have billions to invest, it might work for you, too.
Here are the reasons why discounting is probably a bad strategy for you.
1) Discounting starts price wars where no one wins but the consumer. Manufacturers hate price wars because their product is devalued and they lose distributors who need high margins. Online retailers hate price wars because they end up with such tight margins that it becomes impossible to make money. Dropping your price will likely start a price war. Do you really think you can undercut your competition without them matching your price and possibly going lower?
2) Discounting means that you are surrendering your profit for no good reason. Yes, you might get extra sales for a while until your competition matches you. Once they do, you can forget about raising your prices--it will never happen. At that point, you have surrendered a lot of potential profit both on the sales you have done as well as all future sales.
3) Discounting tends to distract you from real marketing. Face it--discounting is an easy way to make a few quick sales. However, anybody can discount, and if you do it, they all will, too. You would be better off focusing on real marketing. You will know that you are doing your job right when you can sell your product for more than your competition. I admire companies that can position themselves so they can charge a premium price for their product far more than I admire discounters.
4) Discounting does not help you build company equity. Some day, you may want to sell your business. If your business consists of simply selling everybody else's product for the lowest price, you can forget getting any real money for it.
On the other hand, there are times when discounting makes sense. If you want to discount successfully, you must have these two things going for you:
1) The ability to get product cheaper than your competition. There may be times where you stumble on a great deal. Other times, you may get product cheaper by buying in larger quantities (ie: taking more risk) than your competitors. If you can consistently do that, discounting is a viable option for you. That is Wal-Mart's secret.
2) A strong stomach. I can assure you that if you discount other companies products, you can expect lawsuits and other unpleasant problems. Manufacturers do not want their products discounted and they will take drastic steps to prevent that from happening. Be prepared.
Sometimes, you have to weigh the risk and factor in the legal costs you may have to pay. At the end of the day, discounting might make sense.
Most business people do not have either a strong stomach or the ability to acquire product at a cheaper price than the competition, and that is why they should not discount. You probably should not either.