"You can't continually cut product costs without eventually being left with an empty box" is the premise for Tom Fishburne's Marketoon this week (below), showing the constant pressure in business to improve margins through cost-cutting. Cost cutting, according to Fishburne, is still important this year, when consumer confidence is still unsettled and many community costs are on the rise. In this post, I'd like to draw an analogy between product cost cutting and competitive pricing, and how a retailer might suffer if they try to price as low as possible for competitive reasons. Both are slippery slopes. Or, why cutting back on price or product to improve margins can be hazardous to a retailer's health.
While cost-cutting can be the mother of invention inspiring creative problem-solving and efficiency, says Fishburne, it can also tax product quality over time. Fishburne talks about a yogurt brand increasing its margin by putting less yogurt in every container while keeping the same retail price. They also kept the same (size) packaging, which meant that every container suddenly had several inches of air at the top of the yogurt. Then, to justify the obvious drop in value, Fishburne notes that they added a package-burst saying, “Now Room For Your Favorite Mix-ins!” That turned out to be a failed attempt to turn short-selling the product into a consumer benefit.
In the push to increase margins on products, it’s important to remember that there's a cost to cost-cutting. Just as there is a difference between pricing too low and "pricing right," with "pricing right" being aided through the use of competitive pricing solutions. I wrote about this recently in 8 Secrets To Setting Your Competitive Retail Prices Wisely.
Bottom Line For Your Bottom Line:
In the case of trying to be the lowest price from a competitive pricing point of view, i.e. to rank on Comparison Search Engines, or to try and finagle a sale from a finicky, price-conscious consumer, retailers have to keep in mind that no matter how competitive they'd like to be, there could be a point that is too low for them to bear. Making a practice of pricing too low can put a retailer out of business. Pricing right keeps retailers competitive and viable in the marketplace -- at any price.