Cost Effective? Part 3 of 3

In the final part of this three-part series on how catalogers’ pricing strategies are evolving in response to the Web’s effect on branded products, this week I’ll look at the economic factors that can affect promotional pricing strategies.

(For part 1, click here; for part 2, click here.)

While using a promotional pricing strategy can prove effective, there are a number of economic issues you should concern yourself with. Pricing below existing market prices has a number of pitfalls, including the following issues.

1. Can the incremental sales produce enough incremental profit to offset the loss in margin from lower prices? The increase in sales needed to offset the loss in margin is significant.

2. Once your price is at the lowest market price, decreasing prices below this level may shift little market share away from other low-priced merchants. The shift in market share between being the lowest price vs. 5 percent below the market price vs. 10 percent below the market price may be negligible.

3. Pricing below market price can have some unintended consequences. For one, other competitors can match the lower prices. Now your margins have shrunk, and any incremental sales are likely split among all the vendors who’ve matched the new, lower market price.
Also, suppliers can react negatively to lower market prices. They can cut cooperative advertising funds, enforce minimum advertised price policies or cut the distributor’s margin to retaliate for price-cutting below the lowest market prices. Manufacturers typically don’t want price wars.

4. Customers become hooked on buying based solely on lowest price and will respond poorly to higher priced offers.

5. And price, of course, is just one of the four P’s of marketing. The product, packaging and promotion strategy are the other marketing levers that can be used to increase sales.