Consumers prefer lower prices. That’s no surprise to anyone who’s ever tried to buy or sell a product. Walmart’s built an empire on Everyday Low Prices, with enough retail outlets so that 90% of America lives within 10 miles of a Walmart. There’s an important distinction here, though, between an everyday low price (ELP) strategy, and offering merchandise for the lowest price on the market.
With an ELP strategy, retailers aren’t claiming that their prices are always the lowest available. They are claiming that their prices are low every day. There are fewer sales or promotional events, as prices are already low, and it’s possible that another retailer could undersell them with promotional events or pricing on specific items.
However, a strategy that demands having the lowest prices on the market across all product lines is entirely unsustainable. Let’s imagine we have an electronics store called ABC that sells TVs, home appliances, and cameras. Low price sustainability requires high-volume sales, and constantly matching sales at other stores. A specialty camera shop may be able to negotiate better wholesale prices since they focus on a single type of product, which allows them to run sales and promotions that are below ABC’s cost. Maintaining the lowest price means that ABC loses money on every camera it sells.
As other competitors also run sale items, ABC is forced into a race toward the bottom on every product it carries. It’s an unsustainable price war that ensures that while sales may be high, profits will be erased and replaced with lots of red ink. It’s a nearly impossible game winnable only by giant retailers with volumes that allow them to dictate pricing to their suppliers.
However, there are several circumstances where a limited lowest price strategy can be successful:
Breaking into New Markets
For businesses trying to penetrate new markets, either geographically by opening up a new retail location, or product-based, by selling new product lines, a temporary lowest price on the market strategy can work. It helps to build up brand recognition among new customers and can help a business make inroads against existing competition.
However, it needs to be clear to customers that these are sale prices, in place for a limited time period. As customers get to know the business and service provided, prices can return to more sustainable levels.
Loss-Leader Pricing
Adopting a lowest price strategy for specific products can be effective, provided it’s the type of product that will drive traffic to your store or website. It can be even more effective when coupled with a complementary product that has a higher margin.
For example, a company could advertise a lowest price on the market camera to drive traffic to a website or store, and then offer a higher-margin case or accessories. The margin in the complementary product can offset the loss in the promotional item.
Bottom Line
Simply stated, adopting a lowest price strategy is entirely unsustainable. There are, however, several circumstances where a limited lowest price strategy can be successful.
