Blog

Unexpected Consequences

December 19, 2010 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

I must admit I never saw this one coming.

A December 6, 2010 Bloomberg Businessweek article, Wal-Mart Says It’s Cooperating With China Government on Prices http://tinyurl.com/28sxlnp, shows another way that a low price strategy can bite you.

Because China’s economy is growing at such a feverish pace the government justifiably fears inflation.  To help stem the tide of inflation government officials are asking Walmart and other retailers to provide advance notice of price increases and justify them.  Let’s see how this plays out for two different firms.  

One firm employs Walmart’s type of low-price strategy.  Margins are thin.  They’re getting pressure from the stock market and their Board to get the margins up which requires price increases.  Then a government, the government of the most populace nation on earth, asks you to justify price increases.

The second firm uses a value strategy and prices in accordance with the value it offers.  It’s margins are above average.  It, too, receives a mandate to justify price increases.  

Which of these firms is more likely to prosper in the future?  The latter, for several reasons.  First it already has better than average margins which allow it to absorb some cost increases without risking the firm’s future.

Second, if the government sets a target of 2% to 3% maximum price increase, the value firm will enjoy greater prices increases because its base price is higher.  The magnitude of the increase is more likely to cover any cost increases it may face.  Given these scenarios, which firm would you rather be running?  

It’s counter-intuitive, but the a value-pricing strategy affords protection from a broad array of unexpected market conditions including government intervention.

About Dale Furtwengler

---

None

Connect with Dale: