11/15/2011

Cutting Prices

Article
Nectar of Life is a coffee producer like Folgers, Maxwell House, and Starbucks and while all other industry leaders in the coffee world are raising their prices due to higher costs; Nectar of Life is going against the grain.   They are choosing to go against rising costs by reducing their prices in a calculated risk to attract new customers and build some brand loyalty.  They are opting to using some of their producer surplus to appeal to these new consumers and work with smaller margins.
Due to the addictive nature of the product, coffee manufacturers are given an almost essential position in the market place.  Nectar of Life is choosing a Dominant Strategy that will likely have a negative impact on its competitors but could also have a negative impact on the company that squeezes its own margins.  Some economists say this will force them to raise prices eventually.  I think that the company is better off choosing the Nash Equilibrium by raising its price in an effort to maximize its profits and still gain profit share.

9 comments:

Dr. Tufte said...

-1 on Gubler Family for an uninformative link.

Just a short comment on this one: coffee is so faddish, that I wonder if any sort of business model like this is important relative to the elasticity with respect to that fad.

Brandon said...

Even though I understand Nectar of Life's reason for wanting to lower prices in an attempt to attract new customers and build customer loyalty, I do not think this strategy will work out. Coffee is a market that is heavily influenced by brand loyalty and and I do not think that most people are worried about the price they have to pay. Most people will pay for what they want, not what is the cheapest. It also seems as if Nectar of Life is putting themself in a dangerous position financially. By using up their surplus profit through this marketing technique, they will not have much money to rely on if they happen to stumble across some sort problem, such as trouble producing or distributing their products. It will be interesting to see if this pays off for Nectar of Life.

Papa Smurf said...

I think that this is a very interesting move. I do think that in the short run Nectar of Life will be able to capture a portion of the market and perhaps even establish some amount of brand loyalty; and I also agree that it is not a business model that can be sustained over the long run. This is almost a parallel idea to the couponing article we discussed earlier. I am sure that some people will try it to see if they enjoy the product, but the percentage retained will probably be relatively small.

Jack said...

This may hurt their margins in the short run. But I believe that it could be very beneficial in the long run.

With cheaper prices they are able to attract new customers that may find their product to be better. Once Nectar has a large client base then they can raise the prices.

Maybe not quite as high as their competitors but high enough to make a decent profit. But in order for this to work Nectar needs to have as good or better product then its competitors. Otherwise once the prices are raised they will switch back to their original coffee brands.

Cameron said...

Working off of a smaller than normal industry profit margin can be dangerous for a startup company. A startup does not have the benefit of years of profit, production volume discounts and longer term supplier float normally associated with larger companies. I agree that considering the market segment chosen; Nectar of Life is jeopardizing its financial future by focusing on a discounting strategy.

Sam said...

The coffee market is currently quite hot. Worldwide coffee consumption and prices are up this year and have been on the rise for the past five. If there is one thing I have learned in my advertising and marketing career, it is that companies have to spend money to make money. Nectar of Life is attempting to use a pull marketing strategy with their coffee. By charging less for their product they hope to pull customers to their brand. This move can work if they have a superior product that consumers will sample and stay with, if not, then this is a less effective marketing maneuver that does not build brand loyalty as strongly as a traditional advertising campaign would. I personally think they have made a bad economic move. If they ever need to raise their prices they stand to lose the customers they gained through this promotion.

Dr. Tufte said...

I like these last two comments very much.

This is a personal opinion, but it seems to me that entrepreneurs focus too much on price points and not enough on value.

Creating value for customers by cutting the price they pay is a recipe for success if you have economies of scale. But, most entrepreneurs, by definition, don't have economies of scale yet.

In this case, can you imagine being a banker, and having a Nectar of Life executive come and ask for a loan with the justification that they're cutting their cash flow?

Mitchell Stone said...

I had a lot of questions come up when I read this post. How long can Nectar of Life keep up the low price strategy before it has to raise prices again and if they do end up raising prices, how elastic will be the consumer demand for Nectar of Life? If coffee is so addicting, will a lower price be enough to attract those who are addicted to other brands? Will Nectar of Life be able to lower its price enough to attract new consumers without other coffee makers taking legal action for predatory pricing? I agree with the Gubler Family here; Nectar of Life is better of keeping its price high and continue to capture its share of the profits.

Dr. Tufte said...

This will be an interesting thread for another class to come back to in a few years.

My guess is that Nectar of Life is gone by then.