The cost of cheap

Cheap prices have consequences. Beyond a certain point, suppliers simply can’t absorb any more cuts to their margin unless they make a corresponding decrease in quality.

So when the price goes down, something always has to be sacrificed – it’s when this decrease in quality starts to affect customers that suppliers really have a bargaining chip for change.

In fact, cheap can get nasty.

American retail store Wal-Mart learned this lesson the hard way when it was the focus of a 2005 documentary film titled Wal-Mart: The High Cost of Low Price.

The film documents Wal-Mart’s alleged pursuit of profits over people, including its anti-union practices; decimation of local business; refusal to install cameras that would deter the high levels of violent crime in its parking lots; poor environmental protection practices; and paying factory workers in Bangladesh and China making Wal-Mart goods as little as 18 cents an hour.

In addition, Wal-Mart’s store workers were allegedly paid so little they could not afford health insurance, so management suggested that workers apply for government subsidized health cover (Medicaid) instead. No doubt this strategy was poorly received by government, which could end up paying the price for Wal-Mart’s cost-cutting business practices.

For Wal-Mart, the price for being cheap was the hit to their reputation. They ended up employing a “war room” full of public relations people to respond to the barrage of criticism generated by the film.

So, what can we learn from this?

It is in nobody’s interests to find out too late that they have been penny wise, but pound foolish.

Customers regularly sacrifice quality in the pursuit of cheap prices. But the impact of that decision is often poorly understood, and it comes back to bite them later.

What specific things change in your product or service when you have to reduce your quality to meet your customer’s demand for lower prices?

What do these changes mean for the customer?

What do they mean for their customers, for their staff, for their reputation?

What is the true cost of “cheap”?

Making the connection between cheap prices, and what they really cost in the long term, helps customers understand the true commercial value of what you do – and helps you to avoid unsustainable margin erosion.