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Should a Luxury Company Cut Prices?


Quite possibly not—discounting on luxury can create image problems.Offering more value for extravagance, however, may make sense

Q: My wife and I own and manage a beautiful beach resort on the Big Island of Hawaii. We've cut the nightly rate to $199 from $299 and have been marketing aggressively, but many of our rivals have stayed firm at a higher price. Are we doing the right thing? — James Sutherland, Kona, Hawaii

A: When the economy slows, it's only natural to think that lower prices will bring in customers. But, says Chellie Campbell, a Los Angeles financial consultant who works with entrepreneurs, this is usually a mistake. "When I see a company offer big discounts, I think that they're in trouble, or desperate. It's a red flag," she says. "You own a one-of-a-kind dream vacation spot. People will pay to have a luxurious experience. If it isn't priced high enough, people will stay away because they won't think it's good enough."

Plus, lowering prices can kill your profits and hurt the brand you've worked hard to build. The better course of action: Increase value, says Drew Stevens, president of Stevens Consulting Group in Eureka, Mo. To do so, partner with other local businesses to provide discount packages that include treats such as massages, golf lessons, or a luau, suggests Pamela Muldoon, a marketing consultant with Minneapolis-based Next Stage Business. "You offer exclusive extra value to your guests, you and your partners can do collaborative marketing, and they get a chance to build their businesses through a network they didn't have to pay for. Everybody wins," she says. Track the number of guests that sign up for each offer and note which partnerships result in added business.

Don't forget that even small gestures can greatly enhance your guests' vacations and help increase referrals. Make sure each guest gets a welcome basket of flowers, beverages, and candy. Or include local specialties in your gift, with a note about each.

Q: I plan to dissolve my California C Corporation and distribute its cash to myself as the only shareholder. What will be the personal tax consequences? What can I do while the company is still operating to decrease my personal tax liabilities? — Jeffrey Wales, Santa Clarita, Calif.

A: First off, let's hope you're not attempting this on your own. In California there are substantial penalties for improperly filing the formal dissolution documents with the Secretary of State. Issues such as unpaid payroll taxes, improper accounting of deferred compensation, and even property ownership can complicate matters significantly and warrant the attention of a CPA.

When you dissolve a C Corp., any cash you receive in excess of your so-called basis will be taxed as a capital gain on your personal income tax return, says Bob Gellman, director of CBIZ MHM, a San Diego-based accounting, tax, and advisory firm. The basis consists of personal money used to launch the business plus any loans you've made to the company over the years.

One way to reduce the amount you owe is to try to anticipate any lingering expenses involved in winding down the corporation, says Gellman, and then pay as many of those expenses up front as possible. That will reduce the cash distributed to you, and therefore your tax liability. Company expenses incurred after the dissolution may also be deductible. "In some instances, a final pension contribution can also be used to soak up extra cash, get a deduction, and avoid the gain on transfer," Gellman says.

Timing is another consideration. Current long-term capital gains rates are 15% at the federal level and 10% in California, but recently there has been discussion in Washington about raising the federal rate. The possibility of higher rates may make it worth your while to dissolve the corporation sooner rather than later.

To ask Klein a question and read all of her columns, go to businessweek.com/go/sb/smartanswers

Return to the BWSmallBiz August/September 2009 Table of Contents

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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