Attitudes to Price Cutting
Attitudes to Price Cutting
Generally speaking, producers do not favour the use of price as a competitive weapon. Experience has shown that, in a competitive market, no manufacturer stands to gain from price warfare. There is nothing difficult about cutting one's prices to obtain a share of the other man's business. But one's competitors will not stand idly by, watching their business disappear. They are bound to react by cutting their own prices. Once the dust settles, it will be found that everyone's price remains relatively the same except that now each producer will be selling at a considerably lower price than at the outset. In many instances it may be found that brands are being sold at below their full cost and can no longer pay their way. Of course, where a company is ONLINE MARKETING a range of products, it may be able to afford to sell a single product below variable or marginal cost for a period of time but, nevertheless, it may well have placed the brand in question in a vulnerable position.
Most manufacturers prefer to compete on the basis of a relatively high price. They contend that market expansion can be achieved more effectively by means of appropriate advertising and the use of promotions, than by a resort to price-cutting.
There are, furthermore, occasions when a high price is used as a recommendation for the product. One frequently finds that the consumer, having no awareness of the true value of certain types of merchandise, believes that the higher the price the better the quality. For some shoppers, expensiveness is associated with exclusiveness. A good example is to be seen in the ONLINE MARKETING of cosmetics where price has become part of the brand image.
Sometimes, price-cutting can be employed successfully. It depends upon one's relative position in the market. For the manufacturer who occupies a dominant position, the use of his price weapon may prove advantageous if it causes a number of his small competitors to cut their own prices below their break-even figure and ultimately fail. It is a brutal philosophy but one not infrequently followed. Once he has the market virtually to himself the large producer can gradually re-establish his prices at a higher level.
Apart from its affect upon competitors, price reduction can create difficulties with one's distributors. 'Wholesalers and retailers may refuse to take a long-term view and show a resistance to price-cuts which, in the short term, may result in a reduction in the monetary value of their profit margins.
Price reductions often involve a manufacturer in considerable additional expense. If he is to achieve the likely objective of his price change, namely the acquisition of a larger market share, he may have to increase his advertising in order to tell the public what he has done. Failure to do so, and be seen to do so by his distributors, will only exacerbate the retailer's resistance.
What next? - The Uses of Consumer Research
- Price Changes and Sales Volume
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- The Selection of Media