Initiating Price Cuts
Several circumstances might lead a firm to cut prices. One is excess plant capacity: The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs.
Cutting prices to keep customers or beat competitors often encourages customers to demand price concessions, however, and trains salespeople to offer them.29 A price-cutting strategy can lead to other possible traps. Consumers might assume quality is low, or the low price buys market share but not market loyalty—because customers switch to lower-priced firms. Also, higher- priced competitors might match the lower prices but have longer staying power because of deeper cash reserves. Finally, lowering prices might trigger a price war.30
