Lowering Prices To Generate Sales?

Here is another CEO who clearly believes lowering prices does not automatically guarantee  sales increase: Macy’s Terry J. Lundgren.  In his inteview with The Wall Street Journal, Mr. Lundgren  said,

WSJ: Do you think about lowering your average selling price or changing your product blend, as some of your competitors have done?

Mr. Lundgren: Here’s the challenge. We have [a men’s pants brand], and they typically go out the door between $29.50 and $32.50, with all the coupons and everything.

What Mr.Lundgren refers to as “out the door price” is the “pocket price“, the net price after all discounts. The net effect of the discounts and coupons is price leakage that erodes profit, clearly Mr. Lundgren is driving Macy’s to focus on its price waterfall.

Mr.Lundgren’s management serve as the best case study so for on the three components of effective price management:

Knowing the value add to segments:

Our purchasers are women. She’s spending the same amounts but just shopping with a great deal of discretion. Value is the word, even if it’s at regular price. The intrinsic value of what she’s buying is very important.

Incremental analysis: How much should sales rise to compensate for loss in profit from price cuts? (Lundgren is on the direction but he is comparing top-line while he should be doing incremental math on lost profit. There is also numbers error as pointed out by the commenter.)

So we were getting tremendous sell-through at low price points and no margins. And I am not making my pants sales for last year, because my average sale dropped by 30%. It’s really hard to make the math work. I have to have 30% more transactions on this product to break even.

Customer Margin: Understanding that loss leaders are effective only if they help generate incremental profit from customers who are attracted to the stores by low prices of loss leaders.

We and the manufacturer together agreed to mark them (pants) down to $21.99 or something like that. Selling like hotcakes. Every other pants around them stopped selling.

Does your business practice effective price management?

4 thoughts on “Lowering Prices To Generate Sales?

  1. Matt
    You are correct on the numbers. When I quoted Lundgren’s statement from the story I should have checked the numbers and I didn’t.

    In fact incremental analysis must be based on profit and not on top line. It gets worse if we did profit math. Suppose they made $5 profit per unit on $10 price. When the price drops to $7 they give up $3 of profit.
    Using your numbers of 100 unit sales before price drop, the total profit they gave up is $300. To make up the same profit as before they need to sell 250 units.

    Thanks for catching it.
    -Rags

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  2. “So we were getting tremendous sell-through at low price points and no margins. And I am not making my pants sales for last year, because my average sale dropped by 30%. It’s really hard to make the math work. I have to have 30% more transactions on this product to break even”

    If your sale price is $10 and you sell 100 units ($1000 sales), and your sale price drops by 30%, your sales drops to $700. If you then increase unit sales by 30% you are selling 130 units at $7, amounting to 130 x $7 = $910.

    you are incorrect my friend. your unit sales increase must be the inverse of the price decrease to maintain sales…in this case, 1/0.7 = 42% increase.

    Please learn your math. And there’s a gigantic body of literature called price elasticity that you should consider reading if you want to be correct about stuff.

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