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The Peril of Price Cuts

December 2005 Pricing

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.’



About the author

James T. Berger, Managing Editor of The Wiglaf Journal, through his Northbrook-based firm, James T. Berger/Market Strategies, offers a broad range of marketing communications, research and strategic planning consulting services. In addition, he provides expert services to intellectual property attorneys in the area of trademark infringement litigation. An adjunct professor of marketing at Roosevelt University, he previously has taught at Northwestern University, DePaul University, University of Illinois at Chicago and The Lake Forest Graduate School of Management. He holds degrees from the University of Michigan (BA), Northwestern University (MS) and the University of Chicago (MBA). Berger is an often-published free lance business writer who has developed more than 100 published articles in the last eight years. For more information, visit www.jamesberger.net or telephone him at (847) 328-9633.

James T. Berger
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