Sometimes companies lower prices as a competitive reaction. But in other situations, companies cut prices voluntarily, with no prompting from competitors and little from their customers either. They believe that lower prices will revive their customers’ wavering devotion and ultimately make the company better off. But resist that idea, says marketing consultant Hermann Simon. Proactive price cuts don’t make you different, nor do they make you better off. They only make you poorer, unless you have the evidence, the data, and the math to prove otherwise. You’re not likely to replicate the success of Wal-Mart, Southwest and Dell because their cost advantage is so huge, few companies can rival it. There can only be one low-price leader in any industry. “Cutting prices almost always amounts to a huge transfer of wealth from corporate stakeholders to customers,” Simon says. “You run a company, not a charity.” Make sure you extract fair value for what you deliver. Aggressive and acquiescent actions hinder your own efforts to pursue higher profits. Customer giveaways, value attacks, and aggressive price cuts represent a huge transfer of wealth from you to your customers. Price cuts make sense only when they earn you higher profits. Most don’t.

HBS Working Knowledge 1 May 2006