Low Prices Are Not Always Your Friend

Cutting prices might seem reasonable given the state of the economy, but doing so could backfire over the long run, argues our columnist


The economic news has not been good of late, and that may lead you to believe you should find a way to lower your prices. After all, consumers will be looking for ways to cut back. But while lower prices may make sense from a short-term perspective, they may not be as strategic as you think.



When i see Starbucks coffee being sold at quite an expensive price, it makes me wonder why on earth the price is fixed so. However, it also makes me think

"why shouldn't it? Is paying $3, $4, or even $5 for a cup of coffee really so irrational? Perhaps so, if all you're buying is coffee, but if along with it you enjoy a relaxing, pleasant experience it may be quite a bargain. In today's fast-paced culture, how much is 10 minutes of bliss worth?"

Say you were in an electronics store evaluating two TVs that had similar features and design characteristics, but were significantly different in price. Which would you choose? Many people would choose the lower-priced option, but some would go with the more expensive model. Would the latter group be acting irrationally? Not at all—even those who bought the cheaper TV would most likely agree the more expensive option is somehow of higher quality. It would have to be (goes the reasoning) to justify its higher price.

Conclusion
Higher prices may lead to lower sales volume in the short term, but they also provide the margins companies need to invest in brand-building or to expand their distribution networks. I have always thought the cheaper the better, but come to think of it, it doesn't seem right. Price can be a standard by which people judge about the level and the quality of the product.

source: http://www.businessweek.com/smallbiz/content/apr2008/sb20080414_027855.htm?chan=search

Chris Bang
Entry 13