It sometimes seems as if cutting prices is the answer to every business problem. The Disney movie Christopher Robin (2018) is a good illustration of this. Granted, the story is fictional, but the reasoning it portrays isn’t.
In the movie, a now grown-up Christopher Robin is an executive at Winslow Luggages. The company is a struggling maker of luxury luggage for the upper class. So Christopher Robin is tasked with finding ways to cut costs. He soon realizes this means firing loyal employees. Then, he hits upon the idea of cutting the price of the company’s luggage instead. A price cut will make their luggage affordable to everyone so they’ll sell more luggage. Brilliant!
The company directors accept Christopher Robin’s suggestion and no one gets fired. Thus, ending the movie on a happy note.
But the brilliance of cutting luggage prices rests on three dangerous assumptions. The movie producers have the luxury of ignoring these dangers. But you don’t. The real world isn’t a Disney movie.
Dangerous Assumption #1: The increase in sales will offset the revenues lost from cutting price.
Sales may not increase enough to offset the revenue lost from selling at a lower price. It depends in part on the company’s product margins and how much it cuts prices.
For example, suppose you cut price 10% on a product that has a 50% gross margin. Your gross (profit) margin is the selling price of your product minus your cost of buying or making it. It’s what’s left over to help pay for your overhead and to provide a profit.
For example, if you buy gizmos for $.60 each and re-sell them for $1 each, your percentage gross margin is 40%. You have forty cents of every dollar of sales leftover to pay your overhead expenses and, hopefully, leave a profit. You must sell 25% more units just to make the same amount of money as before.
“25% more,” you say. “That’s not a big problem.” But it might be a very big problem! See dangerous assumptions #2 and #3.
Dangerous Assumption #2: The company’s price cut won’t damage the image of its luggage as a luxury good.
A large part of the appeal of luxury goods is the snob effect — not everyone can afford these products. Once anyone can afford Winslow Luggage, their upper-class customers may not want it.
Furthermore, when Winslow cuts it price, it will also cut its gross margin. Suppose Winslow starts using cheaper production methods and materials to offset this. This will make its image problem even worse.
The end result is decreasing sales to buyers who are willing and able to pay for high-end goods.
Dangerous Assumption #3: The company’s competitors won’t fight back.
Suppose Winslow’s competitors cut their prices too. Winslow Luggage could end up selling about the same amount of luggage as before — only now at lower prices!
All-in-all, cutting the price of its luxury luggage could make Winslow’s problem much worse instead of better.
Christopher Robin is a nice family movie. But if you want to stay in business, be careful what lessons you take from it. Remember, price cuts don’t always increase sales and profits. Sometimes they have the opposite effect.
There is a a better way to sell more.