Cut Prices Without Cutting Profits

Late last year, McDonald’s raised the price of its popular double cheeseburger to $1.19 from $1. Crazy idea during a recession, right? Well, no. At the same time, it replaced the sandwich on its all-important Dollar Menu with the new McDouble, a similar but cheaper-to-build burger featuring one slice of cheese instead of two. That allowed Mickey D’s to continue catering to value-conscious consumers while still selling its double cheeseburger at a reasonable profit.

Cutting prices is the conventional way to keep sales moving when times are tough, but doing so can carry a heavy cost: Once you’ve trimmed the ticket for your goods or services, it can be hard to convince customers to pay up again when the economy recovers. If you’re doubtful, just listen to the gnashing of teeth among haute couture designers these days. They’re wondering if, or when, they’ll ever enjoy the big profit margins they once earned on their high-end duds and accessories since slashing prices dramatically during last year’s Christmas selling season.

I prefer the approach of McDonald’s — and so do plenty of your savviest small-business peers. Take Classic Exhibits Inc., a trade show design and manufacturing company headquartered in Portland, Oregon. It recently debuted a wider selection of moderately priced, semi-customizable trade show exhibits for clients who want more than a pop-up display but are no longer willing to spring for a full-blown custom exhibit. “Thank goodness,” says Mel White, Classic Exhibits’ vice president of marketing and business development. “Without those products, we would have been floundering right now. Our competitors have been slow to react, which has given us a decisive advantage.”

To help you come up with ideas for cutting your prices without cutting profits, I dug up five other small-business owners who have taken similar steps to get through this difficult economy:

1.) Margot Tohn, publisher of “Park It! NYC,” a guide to New York City’s 1,100 parking garages and lots, began bundling her flagship publication with other products and selling the package for 25 percent less than what she charges for the products individually. “Traditionally, our customers bought our book or our map, but not both,” says Tohn. “Since I can’t pare down a printed product for a lower price, I created the bundle. Even with the discount, I’m making more money because I’m getting people to buy the parking garages map.”

2.) Aaron Rubin, owner and CEO of S&A Industries LLC, recently redesigned one of his two retailing Web sites — both sell martial arts supplies — to cater to budget-conscious consumers. The revamped site, MartialArtsSupplies.com, carries a narrower inventory than his flagship site, KarateDepot.com, and focuses on his most profitable items — primarily those his company makes or co-brands. It also is more restrictive with its return policy than KarateDepot.com, and instead of matching the latter’s flat shipping rate of $2.95 per order it passes along actual shipping charges. “The idea is to align our costs more closely with our selling prices, which allows us to attract the recession shopper and gain market share without destroying the more upscale brand image of KarateDepot.com,” Rubin says. Today, MartialArtsSupplies.com accounts for 6.25 percent of his company’s total revenues, up from 1.3 percent before the redesign, and its average profit per visitor has increased 20 percent.

3.) Tara Wilson, an event planning and lifestyle consultant in Fort Worth, Texas, cut back on the number of “full event” design packages she was offering late last year and began selling more of her smaller “month of coordination” packages. With that service, used primarily by brides who have done the initial legwork in planning their weddings, Wilson’s company, Tara Wilson Events, steps in to manage logistics and vendors during the 30 days leading up to a wedding. “Clients still want event planning services, they just don’t want the whole package,” Wilson says. “I’m giving my clients what they want and marketing toward the demand.”

4.) Josh Kaye, president of Bake Me a Wish! Inc., an online retailer of hand-crafted gift cakes based in New York City, recently launched a line of small cakes aimed specifically at budget-conscious consumers. With shipping, the 4-inch “Singular Sensations” sell for just under $20, or less than half of what the company’s large cakes cost. “People are looking for a lower price point, something they can remember somebody with without spending a significant amount of dollars,” Kaye says, adding that the new cakes have been well received.

5.) Dale and Karen Port, husband-and-wife owners of Mirage Spa & Recreation Inc. in St. Louis, Missouri, saw demand for their high-end spas sloughing off as the economy slowed. While they did cut prices a bit, Karen says they also began selling demo models at still lower prices and refurbishing and selling used spas, too. These changes, she says, have allowed the company to attract customers who otherwise might have been priced out of the market.

If the recession has made your customers reluctant to pull out their wallets, why not take a page from these companies’ playbooks and come up with pared-down versions of your own products and services? When the economy does recover, you’ll be better positioned to profit from the turnaround.

A former reporter for The Wall Street Journal and Dow Jones and contributor to Barron’s, Randy Myers is a contributing editor for CFO and Corporate Board Member magazines.