Marketing Notes - Should you reduce prices to counter competition?

Let's take a scenario where you join a new firm and are asked to manage a brand. The brand is not doing well right now and you need to prove that you made an impact. You obviously have a limited marketing budget. After a lot of introspection you come out with two choices:

1. Spend budget on advertising

2. Spend budget on price promotion.

What would you choose?

You evaluate the two options and here is the analysis:

1. Price promotion because it will introduce trial.

2. Price promotion because it will attract switchers.

3. Price promotion because it is offensive strategy while advertising is a defensive strategy.

4. Price promotion because big impact expected immediately while advertising will be a long term investment.

5. Advertising because it will influence perception.

6. Advertising because it will create loyalists.

7. Advertising because it increases perception of quality.

8. Advertising because it will build brand image.

Now you also know that in the short run even you don't advertise for a month your sales might not be affected much. e.g. say if coca-cola stopped advertising today, would you stop drinking coke?

I am sure you will go the price promotion route. This is what most managers will do. It seems sensible. However, there is a pitfall in this strategy. It leads you to a vicious cycle.

As you drop prices, you are at par with the other low price products. There are more low price products that high price products. So, the consideration set for the consumers increases. Given a larger consideration set, the consumer becomes more sensitive to price as there is very little differentiation. The product becomes a commodity and you end up with lower margins. Lower margins mean, less cash available for advertising or adding product differentiation by virtue of R&D. So, how do you sell more product - Reduce Prices. And you are back to where you started with. The path of no return!