The company had a well-established brand in midrange audio products, receivers, amplifiers, speakers, and home theatre systems. It had great distribution, and its products were available at retail in big box stores, specialty audio stores and occasionally offered by custom installers as well. As 2009 gave way to 2010, the economy was picking up and competitors were seeing double-digit sales increases.  But this company's sales were virtually flat.  Jim, the vice president of sales, was at a loss regarding what to do. The company's annual sales meeting turned into a shouting match as the CEO berated the sales force, the salespeople blamed high prices and an aging product line and the CFO warned darkly of layoffs if sales did not pick up. As the tension built, the salespeople began to focus their ire on the company's pricing strategy. They reported retailers' complaints that the flagship receiver-amplifier, at $3495, was just too high for the market.  The top management team had no ready response. At the conclusion of the meeting the CEO promised something would be done.  Six weeks later, the company announced price reductions. The flagship product was reduced to just $2845 an 18% price cut.  The salespeople cheered the action and Jim predicted a 25% increase in volume.  The CFO objected strongly, but his concerns were over-ridden.

Three months after the price cut, the scale of the disaster became clear.  The monthly unit sales rate, which had been holding steady in the prior six quarters, had dropped an astonishing 15%. Revenues had plummeted 32%. The CEO was relieved of leadership and left the company four weeks later. He was replaced by the CFO

The new CEO said "enough with gut feel and guesses,"  and  ordered a research study to discover the basis for the disaster and the true value drivers of the buyers.   What he found was that the company's non-audiophile customers used price as the strongest indicator of a product's quality. He ordered acceleration of revision and re-branding of the flagship product, a new "Ultra-Premium" series of products, with a price tag of the flagship receiver-amplifier of $3995. Over the next two quarters, sales picked up markedly, and by the seventh month they had surpassed the previous volume record. Nearly half the new sales were comprised of the ultra-premium products.

Moral:  Lowering the price often does not lead to higher sales volume.

What would you have done in a similar situation? Let the sales people dictate you price? Or not?

With audiophile regards,

Per Sjofors

AuthorPer Sjofors