Thursday, February 2, 2012

5 Reasons to Limit Price Cutting

Price cutting has become a way of life for many companies these days. The reason: To sell at least as much currently as was sold during the comparable previous period. And it doesn't seem to make much difference if those companies sell cars, computers or clothing.
Virtually every seller of goods or services - except professionals such as doctors and lawyers - seems to be engaged in price cutting, a practice that can, in fact, kill your brand or bankrupt your company. Consider these five reasons to limit price cutting...

1. Price cutting is not sustainable. One of the best reasons to avoid continued discounting - aka price cutting by its more acceptable name - is that price cuts can't last. Not for any prolonged period. Competing companies will tell you it costs them about the same to produce their basic product. Example: Every 1-pound loaf of bread requires approximately the same ingredients...flour, water, yeast, a touch of salt. It's how those ingredients are blended and baked that creates the different types of breads.
2. Continued low pricing creates expectations of prices going lower yet. That's because the original low price quickly become a product's generally accepted "regular" price, and consumers seldom fall in love with "regular" priced items. They want - they actually expect - prices to take frequent dips...or they delay buying.
3. Reduced pricing generates a perception of reduced quality. While they may be grateful for the savings, customers tend to think that something which continually sells for less than its competition can't possibly be of the same quality as its higher priced competition. And experience tells them their right. Take house paint for instance. Cheap paint requires two coats to cover; higher priced paint generally covers in one.
4. Brand loyalty quickly erodes when loyal customers see a price cut available to the masses. An occasional special sale - through the use of coupon and other short term price reduction offers - is acceptable and appreciated by loyal customers as long as it is short term and available to a limited audience. But announce a price cut on national TV, for example, and loyal buyers begin to question that product's quality.
5. Products continually on sale are eventually considered discount brands rather than quality brands. A prime example is a nationwide department store chain that sells private label sweatshirts with an MSRP of $38. On almost any day you visit one of their stores those sweatshirts are "On Sale!," marked down to between $18 and $22. In reality the chain has killed the goose that could have laid a golden egg.
Price cutting has its time and purpose, but it's a poor foundation on which to grow a successful company.

1 comment:

  1. Correct on all counts.

    I myself have always wondered why I should purchase 2 gallons of paint at a 'so called discount' when in actuality 2 gallons of 2 coat paint priced at 75% of one gallon of 1 coat paint, always costs me more in the end, whether now or later. In this case 50% more than for the high quality 1 coat paint.

    Goes on all the time, not only here in the USA but all over the world. Look at the Philippine model as an example, one of the prime reasons it is a poor country (in my opinion) is that it thinks poor and everything is packaged and priced as such.

    We will be just like them if we continue on price cutting everything, we have nowhere else to go but 'down'.

    Sadly the only way to price cut is to either reduce the quality or reduce the size and/or quantity. Much like the single serving sizes and watered down product that is prevalent in most of the world today, especially the Philippines.

    Those products actually cost the consumer more in the end. I know this is true as I have witnessed it in the Philippines and other countries I've been to just recently. And most of the USA companies are now following closely in their footsteps . . . . . . . . Discounting, in the only way you can and stay afloat.