The Secret to Boosting Sales Isn't Always Cutting Price
Pricing Pointers, Issue #15
It sometimes seems as if cutting prices is the answer to every business problem. The Disney movie Christopher Robin (2018) offers a good illustration of this; while the story is fictional, the reasoning it portrays is not.
In the movie, a now-grown Christopher Robin is an executive at Winslow Luggage.
The company is a struggling maker of luxury luggage for the upper class.
Consequently, Christopher Robin is tasked with finding ways to cut costs. He soon realizes this means firing loyal employees.
Then, he proposes the idea of cutting the price of the company’s luggage instead.
A price cut, he reasoned, would make their luggage affordable to everyone, leading the company to sell more. Brilliant!
The company directors accept Christopher Robin’s suggestion, and no one gets fired, thus ending the movie on a happy note.
But the brilliance of Winslow cutting the price of its luggage rests on some dangerous assumptions.
Three dangerous assumptions about cutting price
Dangerous Assumption #1: The increase in sales will offset the revenues lost from lowering the price.
Sales may not increase enough to offset the lost revenue from selling at a lower price.
It depends in part on the company’s product margins and how much it cuts prices.
For example, suppose you cut the price 10% on a product that has a 50% contribution margin.
In this case, you must sell 25% more units just to make the same amount of profit as before.
“25% more,” you say. “That’s not a big problem.”
But it might be a very big problem! See dangerous assumptions #2 and #3.
Dangerous Assumption #2: The company’s price cut won’t damage the image of its luggage as a luxury good.
A large part of the appeal of luxury goods is the snob effect — not everyone can afford these products.
Once anyone can afford Winslow Luggage, their upper-class customers may no longer want it.
Furthermore, when Winslow cuts its prices, it will also cut its margins.
Suppose Winslow tries to protect its margins by using cheaper materials and production methods. This will make its image problem even worse.
The end result is decreasing sales to buyers who are willing and able to pay for high-end goods.
Dangerous Assumption #3: The company’s competitors won’t fight back.
A price cut is the easiest move for Winslow's rivals to match.
Suppose Winslow’s competitors cut their prices too. Winslow could end up selling about the same amount of luggage as before — only now at lower prices!
All in all, cutting the price of its luxury luggage could make Winslow’s problem much worse instead of better.
An alternative course of action
If I were one of the directors of Winslow Luggage, this is how I would respond to Christopher Robin’s proposal:
"We make and sell luxury luggage aimed at upper-class buyers who care about the quality and reputation of what they purchase. However, sales to this market segment aren’t enough to sustain our company.
One way to increase our sales and profits is to sell luggage to buyers who are more price sensitive. However, we don’t want to cannibalize sales to our upper-class customers or ruin the luxury image of our product.
The question then becomes: how can we sell more luggage to price-sensitive buyers without hurting sales to our quality-sensitive customers?
The answer is to create and sell a more economical version of our luxury product line.
In doing so, we should:
Use lower-quality materials.
Use a different brand name for this new product line.
Sell it through different distribution channels.
These actions will protect the cachet of our premium brand and discourage our high-end customers from trading down to our economy brand.
As a result, we can increase sales to price-sensitive buyers without hurting sales to our quality-sensitive customers.”
Three takeaways for your own business
Takeaway #1: Price cuts don’t always increase sales and profits. Sometimes they have the opposite effect.
Takeaway #2: Don’t assume you have to cut prices for all buyers in order to sell more of your product or service. Look for ways to cut prices for just some buyers — the ones not willing to pay more.
Takeaway #3: Offering a lower-priced, lower-quality version of your product is one way to do this.