Price changes as an extension strategy

A price change used as an extension strategy means deliberately altering what you charge for a product so that it looks more attractive or more competitive than rivals, keeping sales going when they would otherwise fall. A price change can be a reduction or a rise, although reductions are the more common way to extend a product's life.

How a lower price can help

Cutting the price makes your product look better value next to competitors. That can do two jobs:

• Encourage brand switching – a customer who normally buys from a rival may give your product a go because the saving is worth trying something new.
• Create more demand – people who thought the product was too pricey may now buy it, and existing customers may buy again or buy more.

Businesses use different pricing approaches at different points in a product's life. A product might launch at a high price to recover its development costs, then be cut later when rival versions appear and sales begin to slip. For example, Ridgeway Bikes sells a children's bike at £180. Sales fall after two competitors launch similar bikes at £160, so Ridgeway drops its price to £155 as an extension strategy, hoping families comparing models will choose theirs.

The cost of cutting prices

The big drawback is profit, because the business keeps less money from each sale. If making and supplying a bike costs Ridgeway £110, it used to make £70 per bike and now makes only £45. It must sell far more bikes just to earn the same profit as before, so sales can rise while profit falls. A price rise would protect profit per sale, but it usually slows sales rather than extending them, so it is rarely the first choice.

A planned change, not a quick offer

A price change used as an extension strategy is a deliberate, planned decision to keep a product selling for longer. It is not the same as a short-term sales promotion, such as a weekend "20% off" deal to clear old stock. It also does not guarantee that sales will recover.