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by Laurus Nobilis
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Strategic Management

Price Cut Trends (E)

Price Cut

 


What is the cause to global trend of price cut? What is the way of coping with this price cut trend?

 

Posted: Jul 2009


 

It is more than obvious that most markets are more price competitive today than they were a few decades ago. Prices continues to go down in all segments of supply chain, in retail outlets as well as upstream suppliers of components and raw materials.     

Although the part of price reduction can be explained as the result of normal cost reduction through learning and experience effects during the production process, the fall of prices of many consumer goods has other causes. The illustrative example of price reduction comparison between VCR and DVD player prices in the US market shows that the declining price trend is accelerating:

Price Cut

It took 20 years for a VCR to fall in price from $800 to just over $80, while it took only five years for a DVD player to go down by the same amount. The same phenomenon is visible in markets as diverse as clothing, home furnishings and air travel. A fundamental change in the global competitive environment is driving prices to levels that in real terms are lower than ever. There are several factors that lead to this trend:

  • First, there are new global competitors who have entered the market supported by low-cost manufacturing bases. The rapid rise of China as a major producer of quality consumer products is evidence of this. 

  • Secondly, the removal of barriers to trade in many markets has accelerated this trend, enabling new players to quickly gain ground. 

  • Although the part of price reduction can be explained as the result of normal cost reduction through learning and experience effects during the production process, the fall of prices of many consumer goods has other causes. It took 20 years for a VCR to fall in price from $800 to just over $80, while it took only five years for a DVD player to go down by the same amount.


    Another price cut cause is overcapacity in many industries. Overcapacity implies an excess of supply against demand and therefore leads to further downward pressure on price.

  • A further cause of price reduction is the Internet, which makes price comparison so much easier. The Internet has also enabled auctions and exchanges to be established at industry wide levels, which have also pushed to drive down prices.

  • There is evidence that customers and consumers are more value conscious and aware than it has been the case. Brands and suppliers that could once command a price premium because of their perceived superiority can no longer do so as the customers recognizes that equally attractive offers are available at significantly lower prices. The success of many retailers' own-label products or low-cost airlines proves this point.

As a result of continued a downward pressure on price, in order to maintain profitability, companies must find a way to bring down costs to absorb the fall in price. It is a real challenge to the business is to find new opportunities for cost reduction. This is especially very difficult since companies already performed cost reduction programs. It seams that solution lies in further expansion of sales volume, which brings lower cost per unit, and through full supply chain integration, that is likely to bring lower operational expenses.

 

 

 

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