In This current monitary climate, why don't manufacturers sell their goods at a cheaper price??

February 14, 2009 2:05 PM

In This current monitary climate, why don't manufacturers sell their goods at a cheaper price??

Wouldn't it be better for companies to sell their goods at a lower price, making less profit,but selling more, rather than at a higher price, selling less??

posted by maxmix to work & money (16 comments total)

If the price of everything drops, we're in deflation, and that's not good for the economy. IANAEconomist, but I think manufacturers can't afford to drop their prices anyway. I have noticed that many retailers are having sale after sale, so the prices are dropping at that level at least.
posted by xenophile at 2:13 PM on February 14

A sale these days means more than it used to. A retailer needs to make whatever they can on a sale, because margins are so much tighter than they used to be. The stuff they buy in is costing more, too, so it's much easier to make a loss.
posted by Solomon at 2:17 PM on February 14

There isn't always a correlation between price and demand, so lowering the price might not necessarily increase demand. Demand may not have decreased for some goods, even if there are hard economic times. We all need bread. The costs of production may even have become cheaper (eg oil), allowing the manufacturer to increase profits.
posted by obiwanwasabi at 2:17 PM on February 14

This is mere here-say, but, in my neck of the woods many things re cheaper. Wine for example, and potatoes. Oil (the kind you use when you 'change' it) is very high still, as is celery... but it seems that many thing have dropped in price. I reckon when what distributors brought at a a higher price is gone, prices will drop. Obviously I'm just an old guy with an opinion playing checkers around a potbelly stove in an old general store so varying mileage and all.
posted by dawson at 2:24 PM on February 14

I bought a 160 dollar drill for 80 bucks, some companies ARE unloading, just have to look around.
posted by Max Power at 2:33 PM on February 14

I suspect the answer is something like (a) the cost of the inputs hasn't dropped substantially, (b) there's reason to doubt that the volume of purchasing will respond much to price given budgetary caution, and (c) some nod to this strategy is being done through the failure to pursue scheduled price increases.

Note that there may a need to distinguish between manufacturers (your question) and retailers (some answers).
posted by Clyde Mnestra at 2:33 PM on February 14 [1 favorite]

Wouldn't it be better for companies to sell their goods at a lower price, making less profit,but selling more, rather than at a higher price, selling less??

It usually just doesn't work out, because every price cut is coming right out of your profit.

An example might make this clear: You sell a widget for $10. It costs $5 to make, so you make a profit of $5 each. You sell 100 units today, and you make $500 profit. If you drop the price by 10%, to $9, you only make $4 each, so you need to sell 125 units to make $500 profit. Will a 10% price drop really lead to a 25% increase in sales? Not likely.
posted by smackfu at 2:46 PM on February 14 [1 favorite]

In any reasonably competitive industry, there isn't a large enough margin built into existing prices that they can be substantially cut without wiping out the profit entirely.

Also, I think Clyde's there's reason to doubt that the volume of purchasing will respond much to price given budgetary caution, is right on. When everyone is feeling financially unsafe and is cutting back, the people who are still buying your product are likely to be people who can't do without it, and they're probably buying only as much as they need. Lowering prices won't make new customers suddenly need your product, and it also won't make your existing customers need more of it.
posted by jon1270 at 3:12 PM on February 14

Huh? Automobiles are at rock bottom prices, big-screen TV's are being sold at cost, business jets have gone down by about a third, it's cheaper to buy new appliances than have old ones repaired, computers (except Macs, which seem immune to the current downturn) are at historically low prices…

With the exception of firearms makers, who are enjoying a huge surge in anticipation of a Pelosi/Obama assault (har!) on the Second Amendment, which manufacturers haven't lowered their prices?
posted by dinger at 3:15 PM on February 14 [1 favorite]

The economy is in the crapper now but it will rebound. Many high-ed retailer/companies may want to preserve the value of their brand exclusivity.
posted by ASM at 3:19 PM on February 14 [1 favorite]

Wouldn't it be better for companies to sell their goods at a lower price, making less profit,but selling more, rather than at a higher price, selling less??

In order for what you suggest to make sense, the manufacturer must believe that the increased volume will more than make up for the drop in price. That may not be the case when people are trying to cut back their purchases.
posted by b1tr0t at 3:51 PM on February 14

,but selling more, rather than at a higher price, selling less??

Establishing price is a science as much as anything. What makes you think that the current price of a lot of items arent already in this price/quantity of sales sweet spot? It most likely is at the point where they are getting the maximum margin. Outside of luxury goods where the brand itself demands a huge upmark, I dont think youre going to see too much flexibility with prices.

I bought a 160 dollar drill for 80 bucks, some companies ARE unloading, just have to look around.

You'll see lots of rock-bottom deals for a while as companies lay people off, stop production, and liquidize old inventory. Or from companies that are doing OK but still need to get rid of inventory. If you see that 42" HDTV from a company doing this and it sells for 500 dollars then you shouldnt assume that all 42" HDTVs should be around 500 dollars. These arent sustainable prices. These are clearance prices. Apples and oranges.
posted by damn dirty ape at 4:08 PM on February 14

You also have to realize that it isn't just that people don't have money to spend, but that they're not spending the money they do have. The US savings rate has jumped from something like 0.3% to 2.9% in recent months. People are building up savings, and doing so by not buying things, expensive or cheap.
posted by NotMyselfRightNow at 4:43 PM on February 14

The US savings rate has jumped from something like 0.3% to 2.9% in recent months.

Slight derail- as I understand it, savings are what you put in the bank. What you put in the stock market are not, for statistical reasons, "savings". Fair enough, but I'm wonding if the 2.6 % difference might not be money that otherwise would have gone into stocks, not moonpies and penny whistles.

Any errors of fact, judgement, interpretation, or any further information on this would be appreciated.

Carry on.
posted by IndigoJones at 5:14 PM on February 14

I think this is perhaps too simple of a question, even if you're speaking generally. There are too many variables to this. As others have pointed out, some companies are lowering prices, but their doing so may or may not have to do with having fewer sales. It could be something as random as an increase in manufacturing efficiency (e.g., new, better machines) that could cause something like that.

As for the companies who are not lowering prices, there are again way too many variables in this. Some will be as ASM said, and will not want to have consumers see their brand as a "cheap" one, especially since the economy isn't in a permanent state of terror. More than anything, we've experienced a pretty big slow down of growth (bubble-bursting markets excluded), and it's shocking the system a bit.

Another variable is where things are sold. Contrary to how many view the market, it is pretty localized. Even fast food prices can vary (and we know how franchised those companies are), depending on the country or state. Items are quite often sold, at different prices, depending on local markets, local laws and local taxation. Some places are going to have products for a cheaper price than others will.

Keep in mind, too, that not all manufactured products are marked up absurdly when they get to you. Slashing the price for some products may not be an "option" for the manufacturer or seller, in some cases. They don't want to lose, and you don't want them to, either, as it will either mean down the hole for them or they'll be crying for more of something from your government (e.g., tax credits, getting "bailed out," etc.).
posted by metalheart at 7:05 PM on February 14

Agreeing with above: it's the price/demand curve. But there are tons of inelasticities in prices. (Meaning that all price increases and decreases aren't the same. For various reasons, it might cost me $1 million to reduce my price by 1%, but $10 to reduce it 3%. It's inelastic because it doesn't want to stretch in a linear way. Just like a rubber band that's at the end of it's capacity. You stretch the thing for 6 inches, but then that last 7th inch takes a ton of energy and ends up braking the rubber band.)

Along with supply-chain issues. One of the big problems that happened that almost killed Cisco was that when the tech bubble popped, they were still *increasing* production. So now they had warehouses full of their stuff that wouldn't sell. They made the further mistake of not discounting their prices enough, meaning that while they powered down production, they maintained plenty of inventory. Then when things got better, nobody wanted to buy all their old shit.

Or, as in the cases you cite, where people aren't dropping their prices, it's because they know that demand is inelastic. They know that for better or worse, they are going to sell 100-150 widgets a month, no matter what. Why drop the price and put their people out of work?

Everything works out great when everyone makes rational decisions. When people start hiding information and making irrational decisions, it all turns to shit, in a quickhurry.
posted by gjc at 12:53 PM on February 15