PRICE CUTTING.

Southland Times, Issue 21430, 26 June 1931, Page 3

PRICE CUTTING.

To the Editor.

Sir, —Why does a man in any kind of business resort to price cutting or cutthroat competition as it is sometimes called?

He wants, for obvious reasons, to increase his volume of turnover. To accomplish this he will most likely ascertain in some roundabout way what his competitors in the same line of business are doing. This can easily be done by taking a quiet walk along the shop frontages. They realize that volume is important) very important, and in order to secure it the business man commences to undercut his competitor and so the game goes on, a sort of seesaw business. They forget that volume hunting can be carried to extremes. They vie with each other as to who will survive.

It is quite an interesting pastime after settling down for the evening to read about what is taking place in other centres. According to a Melbourne paper price-cutting has for some months past been carried on by a. section of the retail tobacconists of that city and suburbs and has been conducted ■ with unflagging determination for eight months, during which jxjriod tobacco and cigarettes have been sold practically at wholesale prices. This prolonged battle has involved some serious business casualties and has forced many businesses out of existence; even firmly established concerns have suffered severe losses.

Again, in a Canadian journal I learn that a two-years price war in New York has forced many small cigar and cigarette traders out of business. Coming nearer home I find that in Auckland the competition among the hairdressers and tobacconists has been so keen that one saloon manager has stated that hairdressing never was and never will be a profitable business, that a great many establishments- are not bringing in sufficient returns to meet the wages bill and that if the prices are reduced further it will mean the closing of many businesses simply because the trade was passing through a keen period of cubthroat

competition. Is .it any wonder that my friend Casson calls the price cutter a fool. In a city with a population of 23,000 I find there, is a mixture of twenty hairdressers and tobacconists, without taking into account the numerous traders who sell smoking requisites as a side line, who are following the suicidal example of their New York, Melbourne and Auckland patriots. Cut-throat competition cannot by any stretch of imagination secure increased volume if all traders are taking part in the same policy. There are thousands of business firms which get big volume but at the end of the year their balance sheet shows no net profit. It is a well known fact that the wages of employees must be paid out of profits. Fortunately the wage of the employee is “fixed.” If it were not so cutthroat competition in regard to labour would be the corollary. The danger of securing increased volume through a process of price cutting is clearly exemplified in the following:— Three simple illustrations will suffice. On a 25 per cent, margin of profit, a cut of 5 per cent, requires a fraction over 18 per cent, more volume, a 10 per cent, cut requires 50 per cent, more - volume and a 15 per cent, requires 112} per cent more volume. When business is done on this basis satisfied customers will multiply surprisingly and those profits .that go towards paying an employee a living wage will disappear. No man can sell at or below cost. Even a 5 per cent, cut should get him think-' ing. Here is an extract from “The Nation” a periodical to which “John Wickliffe’s” friend J. M. Keynes contributes a good deal: "Unemployment exists because employers have been deprived of profits. There is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”—l am, etc., OBSERVER.