Leather Manufacturer ltd. is manufacturer of leather handbags in Lahore. Its management is aiming to increase profits by implementing different strategies. Mr Ali; the advisor of Leather Manufacturer ltd. suggested the reduction in current prices of leather handbags to boost the sales which may cause increase in company’s profits. Moreover research and development cost has already been recovered at this stage.
Being a business student you are required to enlist aspects/information which are necessary to keep in consideration before taking the decision of reduction in current price.
Note: List at least four valid points in bulleted form
- Reduction in current price does increase sales and no of customers, but it may or may not increase profitability. This also would depend on the product category. In case of technology and IP products this relationship may not work. It is good to do benchmarking to establish influx points to understand this relationship better.
- In Telecom, we found that in Pakistan customers were paying higher than most developed and underdeveloped countries as a percentage of GDP or other spends. Here it made sense to bring down the price from Rs 6 to Re 1, and the rest is history. Currently the 1 paisa per second may not make sense depending on the Regulatory pay outs and termination charges.
- It may still make some sense if the customer base is large and the on net traffic is large in terms of percentage of usage. However one must be ready to let the margins move south.
- The pricing of a product totally depends on the kind of product and the target audience. If the product is a premium product then if the price is reduced for the product than the customer will look it as a cheap and low quality, thus not helping in increase in sale. If the price is reduced and the other competitors are pricing it as high the end customer will have questions about the credibility of the product. Hence one has to be careful while taking pricing decisions.
- Wrong pricing can hamper the brand image which can hit badly. Hence if the price has to be reduced one has to first ensure that customer is convinced there is no deterioration in quality of the product.