The Cost of Cutting Prices

As the recession drags on and money and job security are concerns, it’s not surprising that consumers continue to wait for sales before making a purchase.

In the short-run, the consumer “wins”— purchasing the item for less. But at what cost?

“When a brand goes on sale, it gives away part of the profit margin needed to invest in future innovation and quality,” says Sheri Bridges, associate professor of business at Wake Forest University and an expert in branding and consumer behavior.

“This affects the consumer’s satisfaction in the long run because the company cannot afford to develop the newer and better products we all want,” she adds.

In fact, Bridges says, firms that keep giving away margin will eventually have to reduce the quality of their goods and services.

“Too many brands think the only way to get and keep customers is by cutting prices,” Bridges says. “In reality, consumers are more interested in high value than low prices. Value is a function of the bundle of perceived benefits offered at a given price. Apple doesn’t discount its products, but it’s still one of the hottest electronics brands around.”

Continual price-cutting conditions consumers to wait for sales before making purchases and sends a message that, in the company’s eyes, the brand is not worth full price.

“Selling products at a discount is like paying someone to like you,” Bridges says. “Good marketers know that sales aren’t necessary, if you’re providing the right value to the right customer.”

By Kim McGrath, Office of Communications and External Relations