The Peril of Price Cuts

by James T. Berger , December 2005

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When I first started teaching marketing to DePaul University undergraduates, I used a textbook that had short one-page cases. In solving the problems and challenges presented in these cases, the students’ universal solution to virtually all the problems ailing any company was “to lower prices.”

In reality, cutting prices is not only a lazy and stupid strategy, it can be down-right suicidal. When a company cuts prices, it simply challenges competitors to follow suit. Everything goes back to the way it was before the first competitor cut his prices except everybody is making less money. Nothing has changed.

The smart marketer today will leave the price variable alone and provide a competitive advantage through the manipulation of the other elements of the marketing mix, i.e. product, promotion or channels of distribution. The watch word of modern marketing is “value added.” A competitor can create an advantage by increase the delivered value rather than lowering the price.

In assessing value, the key point to remember is that value = benefit – cost.
You therefore can increase the value by increasing the benefit and you might even be able to increase the price as well if you can provide greater value than your competitor(s).

My favorite pricing story: The established barber shop in strip mall sees a new barber shop open in the shopping center advertising on its window –‘Haircuts $5.’ Rather than drop his price to compete with the upstart, the established shop put a sign in his window – ‘We Fix $5 Haircuts.’

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Author
James T. Berger, Managing Editor of The Wiglaf Journal, specializes in both finance and marketing and has spent a number in both the investor relations field as well as an account manager and officer at several Chicago advertising agencies.

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