January 11, 2006

Low prices are like cholesterol

Low prices are popular. That’s understandable. But it’s also important to keep in mind they are like cholesterol; they come in two types. Good low prices (like HDL, the good cholesterol) are very different from numerically equivalent bad low prices (the LDL of the marketplace).

Good ones are a result of things like technological innovation, creative use of IT to improve operations and marketing, and a rethinking of the nature of the product and the processes used to make and ship it.

Bad low prices come from diminished product quality, and clever efforts to push a business’ real costs of operating off onto others: unpaid overtime, sweatshop labor, advertising hard-to-collect rebates, and corporate socialism (expecting government incentives to locate in their regions; expecting public welfare programs to keep employees healthy). Bad low prices are also a result of business decisions that are unsustainable economically (Independence Air pricing its seats at below the revenues its fuel-inefficient fleet of planes needed to pay for their gas; Detroit automakers' failing struggles to hold on to their customer base by teaching them to expect deep discounts).

Before buying something cheap, be sure to ask: why is it cheap? Were costs actually eliminated - or did they just migrate elsewhere?

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