RC Passage: Price Reduction

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The fact that reducing price can generate a competitive advantage for a company does not mean that every reduction in price will create such an advantage. Price reduction, like improvement in service, must be balanced against other types of efforts on the basis of direct, tangible benefits such as increased revenues. If a company is already effectively on par with its competitors because it provides products at an acceptable price and keeps customers from leaving at an acceptable rate, then reduction in price may not be effective, since price is not necessarily the deciding factor for any customer in any situation. 

This truth was not apparent to managers of one operating system software vendor, which failed to improve its competitive position - despite its attempt to reduce price. The software managers did not recognize the level of customer inertia that arises from the inconvenience of switching operating systems. Nor did they analyze their reduction in price to determine whether it would attract new customers by producing a new standard of price that would excite customers or by proving difficult for competitors to copy.

According to the passage, reduction in price is comparable to improvement in service in terms of the


tangibility of the benefits that they tend to confer


increased revenues that they ultimately produce


basis on which they need to be weighed


insufficient analysis that managers devote to them


degree of competitive advantage that they are likely to provide

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