Slashing Prices

Dollar SignI recently read an article in Bicycle Retailer and Industry News or (BRAIN) about the Giant bicycle company choosing to lower the suggested retail price of their lower end bikes in order to bring in new customers and get their brand loyalty. Whether or not this strategy brings the desired results will be interesting to see. First lets talk about the economics of the idea. Certainly in a slowing market where supply is greater than demand lowering price would help move product. In fact if you can significantly increase the amount of product sold at a slightly lower margin you will ultimately make more money by increasing the amount of product moving out the door. Certainly, in a slower economy where people are making less and the government is requiring more, cost is a factor in purchasing a new bike. One of their theories is that if you capture them early they will stay with your brand.  I am not sure that this model works. There are many other factors that play into what bike you will ride as you mature in the sport. Fit, weight, performance, and peer pressure. Look at Schwinn. Almost everyone I knew growing up rode a Schwinn. When I started riding in the 80’s the Schwinn Waterford plant was producing some incredible race frames, but everyone wanted something else. The second consideration is your stakeholders. For the stockholder this looks like it may have been a good decision. Stock has gone up dramatically in the last couple of months. The consumer is also a stakeholder and getting a better bike for the buck would certainly be a plus. Giant as a stakeholder benefits as well due to increased purchases due to the lower wholesale price. However, one stakeholder is not that happy and that is the independent bicycle dealer (IBD). The pricing change came after they purchased stock and before they were able to sell. Therefore, the margins have gone down dramatically. This could be a problem as they compete with the online bike market. If Giant loses the IBD they lose their face to the customer. If IBDs try to sell for more than suggested retail it will effect their credibility with the consumer. Any strategy that negatively impacts your direct customer and benefits you is something that should be done with great care if even at all. In the case of Giant, this could bite the hand that feeds them. On the other hand even though they will have lower margins, if the Giant IBDs are selling more product it could be a big win for the IBDs as well as Giant. To determine the effectiveness of this strategy we will have to wait. There are so many factors that play into the the success. I wish Giant and its IBDs success this summer.