The anatomy of price cuts?

Question

This refers to every item for sale (In this case, those expensive electronics). Is there a specific reason why a company would reduce the retail price of an item? Is it because the item is getting old? Too expensive? Or is there some other diabolical plan behind their decisions?

Answer 1

Referring to electronics, the main reason is that it costs less and less to make them over time.  They spend tons of money up front to develop them and then build a factory, but after that they don't cost much to make.  It might cost $1 million to make the first one, but then only a few dollars after that.  So it is $1 million for one, $500,000 for 2, $250,000 each for 4, etc. etc.

If they produce a million of them, that amounts to about $1 each (just an example).  They have to charge alot in the beginning to recover their losses, and sometimes items fail and they lose alot of money.

After awhile, as new technology replaces old technology, people don't want the old technology, so the demand goes down and therefore the price goes down.

Also, competition comes into it.  Like the Playstation, they are losing a ton of money on those because they cost so much to make, but since there is competition from Microsoft and Nintendo, they can't charge more for the Playstations.

The economy also plays a factor.  People don't have as much money now that the economy is in a slump, so they spend less.

Answer 2

no not at all --many people are going to buy but they are impulse buyers and often do not buy what is on sale but what they WANT no matter what the price is as there is a salesperson there to steer them in his or her direction

Answer 3

Actually a couple of reasons:

1. They need to reduce backstock to make room for new models.

2, The company can actually turn a larger profit by selling more at a smaller price than a few at a large price (not always true, but it is part of the supply/demand principle and the steepness of the S/D curve.)

3. Encourage secondary sales. A company marks down an item, lets say a new cell phone. They are hoping to sell you a bunch of downloads or services, so they can make secondary sales. (think of the new iPhone on this one, businessweek just had an article on it and the HUGE amount of money they made on the downloads from the apple store.)