Pricing is an important strategy for helping retail businesses sell products -- determining optimal pricing for a product can improve a business's competitive position against other retailers. Reducing prices on a group of products may help stimulate sales, allowing the business to purchase and stock more inventory and maintain profitability. Several reasons may cause a company to reduce product prices to sell existing inventory.
Market competition can compel a business to reduce product prices to increase sales. If a business must compete with other businesses that offer identical products, and cannot utilize another competitive advantage such as location or superior service, it may have to resort to lower pricing to remain competitive.
Some retail items, such as clothing, garden supplies, outdoor power equipment and snow removal equipment, are seasonal in nature -- consumers typically only buy these products during certain times of the year. As demand for a seasonal product wanes, a business may reduce prices to encourage sales. This allows the business to make room for new, seasonally appropriate inventory.
A product with low unit sales takes up retail space and minimizes the ability of a business to recoup its investment in the products. In order to clear out space for products more attractive to consumers, a business may reduce selling prices to encourage bargain shoppers to buy. This also helps businesses minimize losses on products with low consumer demand.
Price reduction is a common strategy used by businesses that face closure because of lack of profitability, owner illness, poor competitive positioning or other reasons. Business owners who plan to close their businesses may choose to reduce product prices to minimize losses associated with leftover inventory. If a business faces bankruptcy, sales triggered by price reductions can help the business prevent inventory liquidation to pay debt.
In some cases, a business may mark down merchandise as a promotional strategy. Lowering prices on a particular group of items may increase business traffic and encourage visitors to purchase other, more expensive items. A product with a reduced price that is designed to increase sales of other products is known as a loss leader -- although the business may lose money on the discounted items, it may recoup losses through sales of other products.
- "The Strategy and Tactics of Pricing"; Thomas T. Nagle, et al.; 2005
- "Retail Pricing Strategies and Market Power"; Gordon Mills; 2003
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