Marketing, Sales Representation & Consulting Agency
The Cost of Low Price
By
Vicki Lynne Morgan, CMS
President – ANIMAL BRANDS®
Those of us who are students of selling philosophies and strategies will concur that a common premise in selling is to offer customers quality, service, and value – usually translated into price – low price.
Clearly, many of our competitors in the pet industry strive to compete on the best, lowest price to get business in today’s market. But what is the cost of low price? And exactly where do quality and service fit into this picture?
Price is determined by the value of a product, including direct and indirect costs related to quality and service. In order to offer low price, the seller has no choice but to rethink his commitment to quality and service. Surely, there has to be compromise in quality and service in order to achieve low price and to remain profitable for the long term.
Frankly, customers who make buying decisions based on the lowest price are, historically, fickle. Since they are driven by securing low price, there is no guarantee that the low-price vendors they patronize today will be their vendors tomorrow. And, arguably, perpetually low price will most likely take its toll on the seller.
Andrew E. Serwer wrote an article for the June 13, 1994, issue of Fortune magazine entitled, "How to Escape a Price War." The article details the dangers of competing on low price alone. He concludes:
(Serwer 1994)You can’t—presto!—offset lower prices with higher volume. Elasticity of demand won’t stretch far enough to pull you back. According to work done by McKinsey consultants Mike Marn and Bob Garda, the typical S & P 1000 company would need a 12% increase in sales to offset a 3% price cut. That’s because variable costs that come along with increased volume drag down profits. Typically, unit cost won’t fall until sales increase about 20%. In fact, Marn says a price cut of 3% usually produces only a 5% to 6% increase in volume.
Furthermore, national business surveys have shown that the most important customer buying motives have nothing to do with price. In one survey, it was determined that buyers make decisions on vendors based on: (1) business expertise and image – 29%; (2) dedication to the customer – 25%; (3) account sensitivity and guidance – 23%. In truth, there is an infinite number of customer buying motives one could list. The concern for low price is frequently at the bottom.
So perhaps it is time to rethink value as it relates to price. In the long run, customer satisfaction comes from the acquisition of quality (product performance) and service (capabilities and resources) at a reasonable price. Perhaps, herein lies the stability and long-term success for which we all strive. Isn’t it time to reconsider our commitment to the cost of value?
(Nierenberg 1992)"There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey."
Copyright 11/98
Reprinted by Permission
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