Retailers Cutting Prices Is Good For Who?

Nov 22, 2008 by Mark Maier

Most consumers will tell you they love to see price wars, but in the current economic state, it might prove to be a bad thing.  Economists call it deflation and an MSNBC article called "Falling Prices Raises Worries About Deflation" goes to great strides to urge our clients not to cut prices too drastically...

"But be careful what you wish for. If price declines continue and become more widespread, there?s a risk the downward trend could feed on itself in a spiral that can take on a ruinous momentum. It?s called deflation. And some economists are warning the threat is increasing.

?A benign decline in prices amidst a sluggish but recovering economy would be unwelcome but tolerable,? Merrill Lynch economist David Rosenberg wrote in a note to clients this week. ?But the price slashing now under way as the consumer beats a hasty retreat could allow that corrosive deflationary spiral to take hold ? something the Fed wants to avoid at all costs.?

The article goes on to say that consumer spending causes the first ripple followed by other actions in the economy that begin the downward spiral that was mirrored in the Great Depression...

"A sustained drop in prices hurts in two ways. First, because consumers and businesses anticipate prices will continue to fall, they would likely cut back further on spending and investment. Why shell out $1,200 for that flat-panel TV today when you can get it for $800 six months from now?

As spending dries up, the economy starts to shrink; about two-thirds of the U.S. gross domestic product is based on consumer spending. As GDP shrinks, so do the companies providing those goods and services for consumers. As companies shrink or go out of business, unemployment rises. Out-of-work consumers have less money to spend, which cuts deeper into the economy. Once the cycle takes hold, it's very difficult to stop."

It goes back to the basics as it pertains to price wars:
         1) 38% of consumers shop price and item
         2) 62% shop top of mind
These figures might fluctuate depending on the goods or services you sell but I would always prefer to market to the majority than the minority.  Consumers need to be reminded about the choices they have to make purchases, they need to know about your knowledgable staff that provides solutions, the service department that takes care of them instead of shipping items to some far off place, the layaway plan, or the return policy you have that seperates you from the crowd.  You need to continue to invite them.

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