Price Cuts: Case Study

Price Cuts
Price Cuts

PRICE AND MARKET (WOOLWORTH SUPERMARKET)

MICROECONOMICS ANALYSIS: Price Cuts

Introduction

Significantly, under this section the main object will be to analyze how a certain economic phenomenon by a business is likely to impact on the targeted group and consequently ascertain the end result of such undertakings. Thus, microeconomics gives us an insight of what is likely to be anticipated when certain changes are instigated with regard to the operations of a company and this is important because it can further aid in making proper decisions and initiating sustainable operating strategies.

For this section, the microeconomic issue identified is the cutting of prices of products or equally giving of offers by business. The table below briefly illustrates on the tangible issues that will be further discussed.

TOPICQUESTIONTOOL
PRICE CUTS/OFFERSWhy do businesses provide price cuts/offers on products?Competition Boost sales Brand promotion Market dominance Economic recession Market failure
  1. PRICE CUTS

Undisputedly, the pricing of a certain product eventually determines on whether it is likely to guarantee higher sales or losses. Ordinarily, customers are sensitive when it comes to the price of s product that they want to purchase because if it is not a pocket friendly price, then a majority will opt to buy an alternative product that will equally serve the same purpose but at a reasonable price (Dogan, et al 2013).

Similarly, when operating under a certain field competitors are bound to be present. This means that for one to outsmart them they have to come up with effective strategies to lure more customers to buying their products as compared to the rival’s and subsequently gain a large market share ( Pauwels & D’aveni, 2016). Hence, pricing seemingly plays a vital role under such circumstances.

Important to note is that before a business embarks on an initiative of providing price cuts on its products, there are certain essential factors that must be considered. This is so because not all price cuts may work for the advantage of the company. In fact, it is assumed that most price cuts tend to lead to low profit margin for the concerned business and this may hurt the overall operations of the business.

Among the things to be considered includes the long term implications of price cuts. For instance, one a price cut has been made and new customers have joined the bandwagon of purchasing it, increasing such a price thereafter may lead to loss of these customers as such a business must put in place other plans such as improving the quality of the product so as to demand a higher price because without such modification the initial price cut may end up hurting the business.

So as to answer the critical question of why do various businesses offer price cuts, the subsequent section of this paper will dwell on analyzing the various tools identified in discussing the economic issue.

  1. Competition

Foremost, competition is one of the key features of any market. However, stiff competition may force a business out of the market as only the dominant participants get to have the larger market share. To mitigate such an event occurring, businesses are inclined to offer price cuts to their products so as to retain a fair share of the consumers in the market.

By giving such price cuts, it means that such a company can compete fairly in the area of operation. Accordingly, one can argue that consumer would often resort to buying products at reasonable prices, hence if one of the competitors is offering the same product at a higher price it is highly likely that they will lose buyers to the company that gives relatively cheaper pricing. In such a situation, to promote a fair competitive market, prices will thus be relatively proportionate as a result leading to a fair share of each participant in terms of customers and the market place.

  • Sales

Significantly, when a product does not sale it may eventually cause the business to succumb to losses. Thus, the concept of sales can be boosted in a twofold channel. First, for new products that have been introduced to a market it is imperative that price cuts are given so as to entice customers into buying the products.

On the other hand, when there are low buy outs of products, then a company may opt to initiate price cuts all in a bid to try and revamp the product. Generally, price cuts that aim to boost the sale of a commodity have to address a certain deficiency. In this way, having reduced prices serves as an effective tool in enhancing the purchase power of consumers towards a specified product.

  • Brand Promotion

Particularly, for new products that are unknown to consumers, it is vital that price cuts are provided. This is so because, often consumers may refrain from interacting with new products in the market based on aspects such as having a preference of the already existing ones. Such circumstances may impair the emergence of new businesses in that market. Thus, when price cuts are offered as incentives for customers, it id then highly likely that new consumers will indulge in buying the given product based on its reduced pricing.

  • Market dominance

Naturally, for businesses that operate in the same field of operation the market share that one has over the other largely matters. The market share determines the profit that a company expects to acquire from its sales. Hence, companies are motivated to initiate strategies that would put them at an advantage position over their rivals. One of the ways of doing this is by providing price cuts on the products of the business. Price cuts as aforementioned in the discussed sections are an allure for new customers.

When one business obtains new customers that belonged to a rival company it subsequently means that the former company acquires a large market share. However, such an undertakings has its downside in that it forms a platform for emergence of a monopolistic market structure whereby there is only one dominant player. When this happens, consumers are put in the liberty of that dominant player in the market because such a business has all the power and keys of controlling how that particular market will operate.

  • Economic recession

Notably, the economic state of a country determines how consumers of products will purchase and spend on products. In the case where the economy is booming and businesses are not financially constrained, consumers are highly likely to purchase products without much limitations or considerations such as on pricing. In this scenario, offering price cuts whereas fellow competitors are not may harm the business because consumers may not give too much concern about their spending.

On the other hand, when there is an economic slump, in that businesses are not doing as well as they would normally do this thus calls for effective measures to retain and attract customers so as to continue operating.

Under an economic recession situation, consumers would preferably want to spend less. To match with such changed dynamics, then one would argue that price cuts on the products of a business are the most viable solution to follow.

  • Market failure

Considering market failure is a concept that occurs as a result of inefficient allocation of certain resources within the market of operation, then such a situation is consequently likely to affect the operations of the company (Fabella, 2015). For instance, a monopolistic market structure may be deemed as a market failure ingredient based on the fact that new businesses will find it hard to compete in a market that is largely dominated by one player.

Nonetheless, in such a situation a company may opt to provide price cuts on its product so as to try and mitigate the market failure effects which if not diminished will certainly curtail the operations of the other businesses.

  • Government failure

Significantly, the government is duty bound to make sure that businesses operate in a fair and friendly environment. To do this, certain limitations must be imposed and constraining barriers broken down. For instance, take a situation whereby the government fails to monitor the operations of businesses through relative agencies, in such a situation certain business may drain consumers by instigation undertakings that would solely serve their own interest. One of such an undertaking may be over-pricing on the produced products.

However, such an undertaking may not suit all the businesses within the market as such prompting the need to lower prices of similar goods so as to counter the other business competitors.

SECTION SUMMARY

Nonetheless, there may exist factors that may affect this equilibrium price such that a business may be forced to make adjustments. This is of essence because without such alterations, a business is likely to operate under losses. The aspect of price cuts maybe one of the ways that business may use to reach certain equilibrium.

By giving price cuts it fundamentally indicates that a company aims at first increasing its sales and similarly obtains new customers. Importantly, aspects such as the profit margin that the business aims at must be considered before making such a move. In doing this, prior research is essential because without having knowledge of such information then a business may orchestrate its failure.

CONCLUSION

Foremost, markets are placed that are guided by certain distinctive features that must be observed and preserved so as to allow business to operate efficiently. For instance, without embracing the concept of fair competition between rival businesses, then one may triumph over the other leading to unfair labor practices.

Significantly, the importance of government intervention in market practices cannot be ignored. The government plays a key role in regulation of various aspects of the market so as to facilitate proper co-existence between the firms themselves and the consumers that they serve. Without such an intervention, evidently every business would seek to protect their own interests putting aside all other basic requirements such as offering quality products.

When it comes to the various macroeconomic issues that may affect the operations of markets, first it is important to note that such issues may have a direct effect on the activities of consumers and as a result end up curtailing the operations of the business in the end. Microeconomic issues should be looked at from a wider scope. Their particular effects should be analyzed in depth so that the right techniques are initiated to mitigate on their possible hazards.

Significantly, these issues should never be ignored before they may have adverse effects on the operations of the company as such creating the need to find way to move around them and benefit the business.

Finally, without fair market practices, not only does firms suffer but consumers too share in the same suffering. This calls for proper market practices that protect both the interests of the businesses and consumers so that none is inclined to spear-head their own interests on the expense of the other. Where unfair practices may emerge, it is imperative that even the firms themselves take personal measures and approaches to meditate on the negative consequences.

Reference

Boyd, T. (2015, Nov 28). Woolies crisis to go for years.The Australian Financial Review

Retrieved from https://search.proquest.com/docview/1736670877?accountid=45049

Dogan, Z., Deran, A., & Koksal, A. G. (2013). Factors influencing the selection of methods and

determination of transfer pricing in multinational companies: A case study of United Kingdom.International Journal of Economics and Financial Issues, 3(3), 734-n/a. Retrieved from https://search.proquest.com/docview/1392996149?accountid=45049

Fabella, R. V., & Fabella, V. M. (2015). Re-thinking market failure in the light of the imperfect

state. St. Louis: Federal Reserve Bank of St Louis. Retrieved from https://search.proquest.com/docview/1698893264?accountid=45049

Pauwels, K., & D’aveni, R. (2016). The formation, evolution and replacement of price-quality

relationships.Academy of Marketing Science Journal, 44(1), 46-65. http://dx.doi.org/10.1007/s11747-014-0408-3  

Shazad, M. M., & Miniard, P. W., 2013. Reassessing retailer’s usage of partially comparative

Pricing. The Journal of product and brand Management, 22 (2), 172-179. http://dx.doi/10.1108/10610421311321077

Spillan, J. E., & Ling, H. G. (2015). Woolworths: An adizes corporate lifecycle perspective.

Paper presented at the, 13 1-11. Retrieved from https://search.proquest.com/docview/1731519564?accountid=45049

Sprothen, V. (2016, Mar 11). Investors start to turn on ‘treasure island’; doubts grow about

Australian companies’ ability to keep offering big profits and high dividends.Wall Street Journal (Online) Retrieved from https://search.proquest.com/docview/1772148989?accountid=45049

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