10/14/2010

WalMart Price Cuts Backfire

In a move made to generate increased traffic at their stores, WalMart earlier this year decided to drastically cut prices on many of their food items. Their hope in cutting prices is that these items would be loss leaders and bring more people into the stores to purchase more profitable items. Unfortunately for them, this plan backfired, and people came into the store to purchase those extremely cheap items, and did not stick around to purchase other items. As a result, WalMart has been required to increase prices once again.
Some are questioning WalMart's decision in lowering their prices in the first place. The decision to lower their prices to spur revenue would have been a wise decision, had the overall economic well-being of our country been healthier. Since people are still hesitant to spend money on unnecessary items, their strategy backfired. Instead, WalMart should have taken a different approach, such as cutting the prices on some of the large ticket items, while maintaining a reasonable profit margin on complementary items to those large ticket items.
- Ralphie

3 comments:

Dave said...

The "loss leader" strategy is one that is more or less discredited in managerial economics. We're open to the idea, but we keep checking to see if it works, and the evidence isn't very good. We tend to think that people see a lot more benefit in this strategy then we've been able to find.

Color me unsurprised by the Wal-Mart result.

denver said...

If the "loss leader" strategy is one that is more or less discredited then why would companies insist on using it? I did a Google search for Wal-Mart and loss leaders and Wal-Mart has had other issues with loss leaders before. When are businesses going to learn or does this strategy really work in some cases which causes encouragement?

iPoser said...

The "loss leader" strategy is pitiful, unsustainable in the long run, and incredibly irrational altogether. I think desperately uneducated firms use it for a short term fix to boost their revenues in one period, recording the costs in another. Eventually the negatives of this strategy will catch up with these desperate firms in their cash flow and they will be weeded out of the market by their inability to meet their creditor's demands.