Markdowns are a pricing strategy used to drive consumer sales, with benefits including high profits, exclusivity, and market control. Price cutting can also be used to obtain greater profits from a new product or create exclusivity, while controlling the market.
Pricing strategies are among the most important way in which a company competes in the market, primarily to drive consumer sales. One strategy when selling goods in a marketplace is to use markdowns, where goods have high starting prices that fall over a set period of time. Businesses may reduce the price of a commodity for a variety of reasons, such as when consumers enter a market or when consumers become more sensitive to the price of certain items. The benefits of lowering prices include high profits, creating a sense of exclusivity and controlling the market. Like many strategies in business, the use of markdowns is likely to be subject to change as the market changes due to consumer demand or other factors.
Under some market conditions, the use of price cutting is a strategy to obtain greater profits from a new or differentiated product. For example, a new piece of technology – be it hardware or software – may allow a company to set high prices due to lack of competition. This does not necessarily mean that the new product was expensive to create; it just means that a company can charge a high upfront price for the product itself. In some cases, a company charges these high prices to offset specific production-related costs, which in some cases can be quite high. Either way, this can be a popular strategy to use at certain times.
Another benefit of a price reduction strategy is the creation of exclusivity for a particular product or service. In the opinion of some consumers, a high price simply means that a good or service must have some special reason to command that rate. The product may be of high quality, have a specific use, or simply be the only one of its kind on the market. Now, this doesn’t necessarily mean that the product actually provides better service to consumers than any other item. In fact, the item might not really be that valuable; the objective of the pricing strategy is simply to create the perception of value in the consumer’s mind, which makes the individual buy the item.
Firms may attempt to control a market through the use of price cutting. In some cases, a competitor may link a high product price to an expensive production cost. Or, a company that charges high prices for a certain set of goods is just looking for a niche market, which cannot support a large number of competitors. Either way, a company can use price cutting to make a profit while controlling a specific market segment.
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