Can Low Prices Hurt Your Business?

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Low prices draw customers in, true. But that's not all they do. They can also send a message to your customers that you don't want them to hear.

Consider the Giants

Consider two retail giants: Target and Walmart.

Target is the trendier, hipper, and slightly more expensive store. It has cuter stuff, trendier clothes, and nicer selections. You go to Target when you want to take it up a bit in style and quality, and you don't mind paying a (slightly) higher price to do so.

Walmart is the low-price leader. You go to Walmart when you want one of everything and you want it at the lowest price.

Walmart has obviously done just fine with the low-price retail model. They've done so well, in fact, that their efforts to become trendier and pricier haven’t worked. They end up settling back into the low-price leader position. That's where they've established their niche. It's where their customers expect them to be.

And that's the point.

What Your Customers Expect

If you advertise your wares at the lowest possible price, you might draw a crowd. Here's the question, though. Is it the crowd you want to draw?

You've got to take a deep breath and look past the immediate lure of cash coming in the door. Look long-term. What kind of customers do you want? What kind of customers will build your business?

What kind of customers like what you're doing enough to pay full-price?

How Low Prices Can Hurt

• Low prices can end up attracting low-end buyers for your high-end products and services.
• Low prices can scare your high-end buyers away. They're looking for quality and you're offering something that sounds too cheap to be valuable.
• Low prices can tag you as a discount brand when that's not what you want to be.
• Low prices can get you customers that love your initial buy-in (it's so cheap!) but will leave you on the follow-up (full-price) offers.
• Low prices can establish you in a particular market segment, and it might not be the right one for you.
• Low prices can trap you in a loss-leader position you can't afford to maintain.

How Low Should You Go?

Of course low prices aren't all bad. But use low prices wisely. If your entire customer base is built upon the fact that you slash prices to offer the absolute best deal in your market, realize that your customers will leave you when a better deal comes along.

Low prices are a tool that small business can and should use. But you shouldn't plan to build your business on offering low prices... unless you're planning to be the next Walmart.