Reduce Price to Improve Revenues and Margins

CHOICE 1:
SELECT THE OBJECTIVE OF THE PRICE REDUCTION

We reduce prices to improve sales volumes and their resulting margins:

• We
  improve sales volumes by retaining customers who might have left for lower prices offered by other competitors and by gaining new customer volume from customers attracted by our unique low competitive prices.

• We
  improve our margins due to the contribution margins of the customer purchases we saved with our lower price, or from the sales we gained with the lower competitive price. In both cases, the cash contribution we receive on sales to the saved or gained customers, increases the company’s cash and lowers its total cost per unit. We may also increase our revenues or reduce our costs by rewarding customers for actions they take to improve our margins.

Accordingly, we have one of
three objectives when we lower a price:

• Audio Tip #206: Pricing Objectives in a Falling Price Environment

1. Attract customers by encouraging them to make an initial or follow-on purchase, thus increasing the company's revenues. This objective encompasses the following sub-objectives:

• Attract customers of a vulnerable competitor. A competitor may be vulnerable due to its offering a value proposition with poor performance or high prices. Illustrative Examples>>

• Encourage initial or occasional demand from customers Illustrative Examples>>

• Encourage purchase of services or other products separate from the discounted product Illustrative Examples>>

• Improve share of customer purchases Illustrative Examples>>

• Liquidate inventory Illustrative Examples>>

2. Retain customers who would purchase from a competitor were it not for the company's lower prices. This objective encompasses the following sub-objectives:

• Match competitive prices Illustrative Examples>>

• Punish or preempt competitive discounts Illustrative Examples>>

• Narrow price differences with competition Illustrative Examples>>

• Avoid adverse public action reducing company revenues Illustrative Examples>>

3. Reward customers to encourage their actions that increase the company's revenues or reduce its costs. This objective encompasses the following sub-objectives:

• Reward customers whose cost-to-serve is lower than average Illustrative Examples>>

• Shift demand to more favorable place or time Illustrative Examples>>

• Reward creation of demand Illustrative Examples>>

To Choice 2 Directions>>

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