How can companies initiate price cuts and what are some of the traps that companies may fall into because of this? Customers often question the motives behind price cuts, how would you handle such an issue?
The economy of USA was just recovering, which means it hadn’t fully recovered. Indian buffet, which offered a gourmet meal had cut-off its price from somewhere from $10 to as low as $5/6. The company had to cut the price to avoid itself to from slowdowns and shutdown like other restaurants right and left. The Indian buffet could sustain the market by boosting the sales.
According to Claessens, a company might cut price to dominate the market by a low cost strategy. It helps the company to boost the sales by offering the product in a cheaper price than the other competitors. In a shelf of Bhat-Bhateni, if you find two products with same weight and quality, you are more likely to pick the product which is less costly. This is why a competitors might go for low cost strategy. Secondly the company can go for price competition if the company has an access capacity of production. As the capacity increases, the company can enjoy economy of scale to produce subsequent product at a lower price. Thirdly, the company can go for price cut if the economy of the company is weak and sales are likely to do down due the availability of fund. Lastly, the company can initiate price cut as a way to imitate the competitors and increase the market share. However, we also need to understand our volume of production and capacity to serve the increased market if suddenly demand of the product increases with price cut.
There are however some traps the companies fall into by initiating the price cut. First is low-quality trap. According to an article, customers buy on the basis of the perceived value and by underpricing the product and services, people’s perceived value of the product decreases while on the other, it slims down the profit and loyal customer base. Secondly, the next trap the company falls into is fragile mare-share trap. The customers of the company might not be loyal to the low price companies and might be encouraged to brand switching. In a survey, by the comparison of Everyday Low price store Vs other store found that people actually want to pay for services while EDLP was likely to promote brand-switching to other high quality perceived brand. Thirdly, the next trap might be shallow pocket trap where the competitors might be a big shot and might further go down in price for a neck-to-neck price competition for a longer term. For example, Chaudhary group can go for a lowering price competition it other company’s noodles becomes popular in market and for a longer period until the competitor phases out from market. However, some companies like Cosmic air, had to shut-down because they couldn’t sustain themselves in the cost competition they had initiated.
There are different ways to handle cost-cuts. We can communicate it as special offers that is for limited period. We can relate this offers to special occasions like festivals, some national days etc. Similarly, while cutting cost, we can emphasized that we haven’t compromised in our quality concerns related to the product.