Price-Cutting Explained: 5 Types of Price-Cutting Strategies

The definition of price-cutting is quite simple: It is the act of reducing prices on goods and services. Price-cutting can be a marketing strategy to introduce a new product. It can also be a short-term way to boost overall sales, particularly near the end of financial reporting quarters.

Retailers sometimes engage in price competition to win customers from their rivals. In some cases, these price competitions escalate to a price war, where competitors continually roll out lower prices that increasingly eat into profit margins.

Price cutting takes several forms in capital marketplaces.

1. 1. Sales: Many retailers lean on sales as a short-term pricing strategy. An item that is "on sale" has a temporarily reduced price. Supermarket chains and clothing retailers have built notable reputations by offering weekly sales.
2. 2. Loss leaders: In some cases, retailers heavily cut prices on certain items to lure people into a store. These low-price items are sold at such a discount that the retailer loses money on the transaction. However, the hope is that while the customer is in the store, they will be enticed by other items sold at comparatively high prices. The store then makes a profit on these higher-priced items.
3. 3. Permanent price cuts: Sometimes a business's variable costs go down, and they lower prices in response. For instance, if an electronics manufacturer receives a glut of semiconductors at an excellent wholesale price, their manufacturing costs go down. To compete with similar manufacturers, they may cut prices to reflect their own savings.
4. 4. Predatory price-cutting: Predatory price cutting is a pricing strategy used by big retailers. These massive corporate chains sell various products at a loss to lure all customers away from smaller competitors. They keep these low prices for such a long time that many competitors are forced to be bought out or close entirely. Once the large retailers corner the market, they usually raise prices, and the low-cost savings disappear along with the competition. Big corporations can do this because they have ample access to lending and, when they are publicly traded, can pay off bills using shareholder money. This makes them less reliant on daily cash flow compared to small, privately owned retailers.
5. 5. Price discrimination: Price discrimination is a pricing strategy under which the same good or service is sold at different prices to different customers. An example is an internet provider selling the same service for a higher price to business customers than to residential customers. The provider effectively offers a price cut to the residential consumer. Meanwhile, the underlying core costs to the internet provider are nearly identical for both kinds of accounts.

Price reductions, both short-term and long-term, come with a unique set of tradeoffs.

• Increased volume of sales: Lower prices mean less profit per unit sold. However, price-cutting can also lead to a greater volume of overall sales. When volume massively increases, a business can end up making more money, even if the per-unit profit is comparatively low.
• A way to win new customers: Price-cutting can help shoppers take a risk on a new product, which can shift loyalties from one retailer to another.

There are some potential cons to price-cutting strategies.

• Not always sustainable: In many cases, price-cutting leads to unsustainable profit margins. Most retailers can only cut prices on a short-term basis; eventually, they will need to increase prices to meet their own expenses.
• Often favors large conglomerates: Aggressive price-cutting—particularly predatory price-cutting—tilts the scales toward large, publicly traded companies that have access to investor capital or that have other corporate arms that can support them financially. Small retailers, or mom and pop shops, rarely have access to such credit. They must pay the bills using their daily and weekly cash flow. Major price wars often end with small businesses shuttering and consumers having few choices beyond a corporate conglomerate.

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