When RJR announced to distributors last week that it will raise prices on most of its cigarette brands, speculation quickly arose that the price wars made notorious by 'Marlboro Friday' might be drawing to a close. If the companies in that category are serious about making money, cessation of pricing hostilities couldn't come soon enough. A new report by McKinsey & Co. examines just how destructive price wars are - for everyone but the lucky consumer, that is. As the report points out, 'Profits are extremely sensitive even to slight declines in average price level,' which is why a typical company would have to reap a 20% gain in sales volume to break even on a 5% price cut. 'When you do battle on the basis of price alone, you just cannot win from a profit standpoint.' Even after a price battle ends, the effects can linger. In this regard, the authors of the report (Bob Garda and Mike Marn, both of McKinsey's Cleveland office) cite the airfare wars of '92, which briefly yielded a $199 round-trip fare for New York to Los Angeles. 'Tens of thousands of travelers now have it etched in their minds that $199 is the correct and acceptable price for that trip. They will not take it again until fares return to that level.' And sluggish demand for vacation flights in '93 supports that supposition. The report mentions other research on 'price psychology' that finds consumers remember longest the lowest price they ever paid for a product - making it a 'reference point for a very long time - even for life.'
Copyright Adweek L.P. (1993)