Why Slashing Prices Also Cuts Up Your Brand

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Despite the startup boom’s reputation as a job-creating machine, small businesses in the United States have been slowing down. Thanks to a decade of slumping productivity, fewer people are starting businesses, and those who are aren’t feeling confident about their ability to turn a profit. That's why some startups, hoping to jump-start sales, have slashed prices.

Related: The Dark Side of Discounts

But this short-term solution has a long-term down side: Eye-popping prices will bring more customers in the door, but those same prices set dangerous expectations. When sale signs come down and the prices go back up, customers hooked by the initial deal disappear.

The discounter’s dilemma

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People don’t see discounts as discounts -- they see sale prices as the product’s true market value, the amount they should be expected to pay at any time. When prices return to their original level, people shut their wallets until the next sale. And that traps entrepreneurs in a cycle of ever-thinning margins until they can no longer afford to remain in business.

I’ve seen businesses get sucked into this whirlpool time and time again. Cleaning-services startup Homejoy charged north of $85 for a house cleaning, but in a bid for fast growth, it dropped its price to $19. Thousands jumped at the introductory offer, but -- surprise! -- didn’t return for the restored $85 edition.

That's the same fate that befell Aeropostale, once a high-flying clothing brand, which tried the discount tourniquet to stem bleeding sales. The strategy was a disaster, further destroying the apparel’s perceived value and ushering in the brand’s bankruptcy.

Related: What the HomeJoy Failure Tells Us About the Future of the On-Demand Economy

Value is in the eye of the beholder. If you lower your prices, you signal to customers that your product isn’t worth what it used to be. So don’t fall into price-cutting peril. Follow these steps to keep your margins manageable and customers paying what you’re worth.

1. Build trust before you bust.

The verdict is in, and has been for some time: Trust leads to sales. With 83 percent of customers recommending trusted brands to others and 82 percent frequenting brands they trust, entrepreneurs must vigilantly build trust with their current crop of customers.

Fortunately, entrepreneurs have plenty of opportunities to do just that. Becoming a thought leader -- whether through bylined content, press mentions, commercials or popular media -- builds trust and positions the brand as an authority in its space. When my company ran a commercial on the entrepreneurial hit show Shark Tank, for instance, we sought to boost our credibility with existing customers. The tactic worked, generating 400 leads in just two weeks with one well-placed commercial.

2. Retarget top shoppers.

Retargeting allows entrepreneurs to reach into the past and bring former or existing customers back to the cash register. And, considering that 70 percent of site visitors are more likely to convert after viewing a retargeted ad, the retargeting mantra bears repeating.

So, don’t spend days sniffing out new customers while you neglect the easy sales right in your backyard. Retargeting is a tactic open to entrepreneurs of all stripes. Interior design company Lulu & Georgia made ad retargeting the centerpiece of its own campaign to reclaim customers, and it worked: The brand doubled monthly revenues in four months and increased client lifetime value by 29 percent.

3. Be loyal to your loyalists.

Study after study has found that it’s more cost-effective for brands to retain customers than to acquire new ones, so give your super fans ample reason to return. Provide perks like free shipping and early access to merchandise for your best customers, and they’ll provide you the revenue to keep growing. Use social media to incentivize loyalists to refer friends the way Diamond Candles did, or take a cue from BeautyCon and build an exclusive online lounge to make fans feel like MVPs.

4. Strike when the market’s down.

During an economic slump, niches in your industry will open up as other companies contract. Remember how Aeropostale fell after slashing its prices? That fall gave other teen apparel retailers, such as Abercrombie & Fitch’s Hollister plenty of room to grow.

And it’s not only retail businesses that can benefit from a sluggish market. In our business, marketing agencies saturate the entertainment world. When times are good, companies stick with their agencies of record, and our pickings are slim. But when agencies raise prices or start to close, that’s our cue to swoop in, snagging clients who are unhappy with their current situation. While everyone likes a bull market, downturns offer unexpected opportunities for growth.

Related: Secrets of the 10 Most-Trusted Brands

So, don’t slash your prices to make a quick buck. Double-down on branding, make existing customers the star of your show and seek expansion opportunities when others tuck tail. Keep your head held high in tough times, and your brand is sure to flourish when bluer skies return.