Short cut to price cut
By Md Rezaul Karim, 9th Aug 2012 | Follow this author
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Posted in WikinutBusinessAnalysis
It's easy to capture customers with price cut but it is short lived and unsustainable.
Win with quality not price
You cannot hide in business; it never means you win if you lose prices!
You can shout, your can fight, but you can’t be on war!
It doesn’t matter if you like the music of Manowar or Gwar!
One naughty boy would ask, what are you talking about pal?
I say businesses.
In business you can compete
Compete with your feat-
Never ever try to cut your coat to suit others!
Never slash your profit or earning margin
Then, it means you are going down and down.
The logic behind not to slash prices or go on competition in lowering the prices could be summed up as follows:
The reasons for price wars are detrimental:
McKinsey & Company’s research report (2463 firms).
a. Price-Profit-volume affects:
1. Profit-price sensitivity:
We must remember that if we have got 3% price cut, it means we are having 37% Revenue cut. So, the pressure on sales force will be increased tremendously. More volume sales needed. Secondly, if you consider 3% price cut it would require 12% or equal more volume increase. In simple words Price elasticity 4:1 against the normal time 2:1.
2. Price VS profitability:
Price cut not only affect the revenue and volume sales rather it kisses the profitability too. For instance, 1% improvement in price would mean 11.1% improvements in operating profits. Otherwise, 1% reducing of Variable Cost would result in 7.8% improvements in Operating Profits. On the other hand 1% improvement in Volume sales would turn in 3.3% operating profits, similarly 1% improvement in Fixed Cost would mean 2.3% rise in operating profits.
a. Price cut short lived:
Partcularly in the business like Book retailing, Airlines, food and lumber price cut cannot go for a long shot.
b. Low price remembered:
People usually remember the less quoted price that were made earlier. So, for durable products like Car sale rebate to customer is damaging for businesses.
d. Low price undermine Value and benefits:
Obviously less value less priced, best quality cannot be sold cheaply. So, the product differentiation would automatically tagged with the price of premium rate.
So, in conclusion always focus on differentiation or quality or customer value not the cheaper price or price cutting schemes.
Comments
9th Aug 2012 (#)
I wish (at times) my husband's boss (car sales) would take this approach but sadly, he doesn't. Great advice and so darn true. Thank you for sharing.:)
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10th Aug 2012 (#)
Thank you, people normally choose the short cut ways.
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9th Aug 2012 (#)
Great analysis, Professor. Right on.
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10th Aug 2012 (#)
Thank you Buzz for stopping by.
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12th Aug 2012 (#)
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13th Aug 2012 (#)
Thank you Evelien for your interest in me.
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13th Aug 2012 (#)
Price cut has its limits as it will affect quality and after sales service of products. Good analysis, Karim - siva
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14th Aug 2012 (#)
Thank you as always Siva ji.
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15th Aug 2012 (#)
great observations, anything related to price always affects us
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26th Aug 2012 (#)
Thank you Deepa for visiting me.
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24th Aug 2012 (#)
Great job on this.
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26th Aug 2012 (#)
Thanks Teila to see you again.
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