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The Price Cutting Challenge

Presented by: Al Bates, Principal, Distribution Performance Project

Targeted Price Cutting—For most firms relatively few items in the assortment are exceptionally price sensitive. These are the ones on which the firm absolutely must be price competitive, even if competitors are making irrational pricing decisions. Furthermore, the firm must communicate how price competitive it is. It is not enough to cut prices here, the cut must be broadcast to maintain a positive competitive position.

As a general rule, the items that deliver the top 60.0% of sales volume are the genuinely price-sensitive SKUs. That means that if all of the SKUs are arrayed in order from highest to lowest dollar sales, the SKUs at the top of the list—probably 10.0% of the SKUs—provide 60.0% of sales.

It is tempting to cut prices beyond this point. In fact, there may be selected items beyond the top 10.0% of the SKUs that need to have price cuts, but there are probably only a very few of them. The essential marketing point remains. If the firm must cut on highly price-sensitive SKUs it should brag about it so customers are aware the cuts have been made.

Margin Build Backs—At the other end of the product spectrum, there are lots of SKUs that are not price sensitive at all. In addition, during slower sales periods these are products where competition may have reduced inventory and may not have the items in stock. These are the items on which prices can actually be adjusted upwards—even during a recession—to build back gross margin sacrificed in the targeted price cutting.

Probably somewhere around half of the SKUs may qualify as margin build-back candidates. Unfortunately, they only generate something like 5.0% of total sales, so the increase in price needs to be significant.

However, significant is attainable. On these items, the value added that the firm provides is availability. It is not a minor value added, it is a major one. It should be a focal point of the selling effort.

You can learn more about this at my session on Improving the Bottom Line at UID.

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