Prepared for SWA
Vol. 23, No. 3
Price Cutting Economics:
Know Before You Go
By Dr. Albert D. Bates
President, Profit Planning Group
In distribution at the present time there is a feeling that firms must become more price aggressive than they ever before. A large component of this perception can be attributed to the emergence of new internet-based competition. Some of it is simply the feeling that price is a significant driver of purchasing behavior in a slowly-recovering economy.
Whatever the reasons for the increasing price aggressiveness behavior, a word of caution is in order. Lowering prices can be a successful strategy only when if the firm achieves two goals. First, the new pricing must produce a significant sales gain. Second, lower margins must be offset by lower costs.
This report looks at the issues of enhanced price aggressiveness from two distinct perspectives:
The Economics of Price Cutting—An analysis of the changes in operating economics required to make price reductions a positive profit move.
Marketing Realities—A review of the extent to which the world really is becoming more price oriented.
The Economics of Price Cutting
Any profitability analysis of lowering prices must be based upon three factors, all of which are difficult to predict. First, how large of a price reduction is required to get attention in the marketplace. Second, what sales increase, if any, will accrue from the price reduction. Third, to what extent can operating costs be reduced to support a lower-gross margin strategy.
Every firm will have distinct ideas regarding these three factors. However, some insight into how […]