Any organization, that intends to sustain itself in the long run, must ensure that it adopts effective strategies that help it to sustain in the highly competitive market. In the face of cut-throat competition, many companies adopt the low-price strategy, whereby it lowers the price of its products, in order to gain competitive edge over its rivals. The assumption underlying the strategy, is lower the price, the higher will be the demand, and increased sales will eventually lead to increased rate of revenue. However, although the traditional theory of demand states that higher the price, lower accounting demand will be, and vice versa, it is important to critically analyse if lower price will invariably lead to higher profit or not.
Price is definitely one of the most important factors, and one of the most vial elements of the 4Ps of marketing, that determine the sales growth of a product. Often companies believe in selling products at highly competitive prices, as it helps them tap the attention of the consumers much easily, and achieve consumer loyalty as well. This is why, many companies lower their prices, allow lucrative discount rates and follow a low-price strategy for each of its products. However, lower price does not necessarily imply higher profit margins. For example, an emerging organization that is still at its growth phase will have to incur various start-up costs that in turn will increase the total overhead cost (Tisdell 2015). In such a situation, if the company decides to reduce its selling price, it will definitely not be able to make profit, as its revenue will be low, while its expenditure will nevertheless be incredibly high. Hence, lower price will not ensure higher profit in all circumstances. Low price strategy cannot be a long-term plan of any organization, as it does not ensure sustenance in the long run. However, often organizations enjoying a large share of the market, manage to survive with higher profit margins, when they choose to cut their product prices. These large and well-established organizations can effectively employ the low-price strategy, as they can easily survive on low profit margins for the time-being, and thus lowering the product price makes it even tougher for its competitors to compete if they cannot make a profit at those lower prices. Thus, often organizations often lower their prices with the purpose of attracting consumers for a brief period of time, and gaining consumer loyalty, after which it raises its prices, once its competitors are totally knocked out. This form of pricing strategy, also known as predatory pricing strategy can be highly an effective strategy that can be profitable for the recognized organizations to gain consumer loyalty, and attain competitive advantage (Kapur et al. 2016). As more consumers will be attracted to the low-priced products, they will tend to buy greater number of the products that is likely to enhance the sales volume as well, and contribute to the higher profit margins as well.
There is no gain stating the obvious fact that often an increase in the price leads to the reduction of sales volume, as in a highly competitive market, the consumers will tend to look out for cheaper alternatives. On the other hand, despite the decrease in sales volumes, it may increase the profit margins, simply because the product sold to a limited consumer base, is sold at a higher cost, and the perceived value they attach to a high-priced product is irreplaceable. In order to illustrate the point, one can refer to the pricing strategy and profit margins of Apple and Samsung. Apple has always maintained a high price point strategy, whereby it does not reduce its price in order to attract consumer attention. On the other hand, economics, a strong rival of Apple, nevertheless offers a very similar feature-set and design flairs, and offers it at a lower price (Armstrong et al. 2015). Yet the profitability of Apple is unsurpassably high. The reason behind the high profitability of Apple, is the hype it creates amongst its consumers regarding the quality of its premium-priced products. While lowering the price can definitely increase the consumer demand for a brief period of time, most of the consumers will tend to devalue the quality of the brand. This perceived value of the brand will determine the sales growth in the long run. No matter what, but there will always be cheaper alternatives available in the market, and hence there is always a chance for the consumers to switch to the even cheaper product selling companies. The lower price strategy often affects the consumer brand perception in a negative way. Research reports have suggested that lower price is associated with lower perceived brand quality that affects the sales growth of the company, in the long run (Nagle et al. 2016). It in an undeniable fact, that a company that offers products at a lower price than before, will tend to compromise with the quality of the product (Natenberg 2014). It should be remembered that lower price does not essentially imply higher profit margin. On the contrary, it can ensure higher profitability, if and only the sales number remains constant. A company reducing its price by lowering the quality of its products, will not be able to sustain in a competitive market, and will be led to net loss.
It is important to note that lowering the product price can definitely entail higher profit, for a short span of time. This is especially profitable for companies that are still in the introductory stage of product life cycle, or for companies trying to penetrate a new, competitive market. This pricing technique is known as penetration pricing strategy, whereby an organization sets a comparatively low initial entry price, that s most often lower than the eventual market price, in order to attract potential customer base. The strategy is implemented with the belief that the consumers will be tempted to switch to the new brand because of the lower price. However, in the long run, the company will have to increase its price, so that its brand value does not get misinterpreted by the consumers, and it can improve product quality in the coming years. It should be noted that even if a consumer is asked to buy the same product offered by three brands at $20, $50 and $500, people will not simply buy the first brand, but will rather carefully research the unique qualities offered by the most expensive brand. Hence, price determines the customer’s perception of a brand, and hence low price can affect sales in a negative way. Hence, the company can offer high quality products, and employ a premium pricing strategy, to attain product differentiation, and still make huge profits. The key to success is just to prove to the consumers that the product quality justifies a premium price.
Armstrong, G., Kotler, P., Harker, M. and Brennan, R., 2015. Marketing: an introduction. Pearson Education.
Kapur, P.K., Kumar, V. and Shrivastava, A.K., 2016. Strategic Price, Warranty and Profit Maximization Model of a Software Product Using Dynamic Optimization. International Journal of Reliability, Quality and Safety Engineering, 23(01), p.1650002.
McDonald, M. and Wilson, H., 2016. Marketing Plans: How to prepare them, how to profit from them. John Wiley & Sons.
Nagle, T.T., Hogan, J. and Zale, J., 2016. The Strategy management and Tactics of Pricing: New International Edition. Routledge.
Natenberg, S., 2014. Option volatility and pricing: Advanced trading strategies and techniques. McGraw Hill Professional.
Tisdell, C.A., 2015. The theory of price uncertainty, production, and profit. Princeton University Press.