Start With Why

commodities brought it upon themselves. I cannot debate that dropping the price is not a perfectly legitimate way of driving business; the challenge is staying profitable.
    Wal-Mart seems to be an exception to the rule. They have built a phenomenally successful business playing the price game. But it also came at a high cost. Scale helped Wal-Mart avoid the inherent weaknesses of a price strategy, but the company’s obsession with price above all else has left it scandal-ridden and hurt its reputation. And every one of the company’s scandals was born from its attempts to keep costs down so it could afford to offer such low prices.
    Price always costs something. The question is, how much are you willing to pay for the money you make?

Promotions
    General Motors had a bold goal. To lead the American automotive industry in market share. In the 1950s there were four choices of car manufacturer in the United States: GM, Ford, Chrysler and AMC. Before foreign automakers entered the field, GM dominated. New competition, as one would expect, made that goal harder to maintain. I don’t need to provide any data to explain how much has changed in the auto industry in fifty years. But General Motors held fast through most of the last century and maintained its prized dominance.
    Since 1990, however, Toyota’s share of the U.S. market has more than doubled. By 2007, Toyota’s share had climbed to 16.3 percent, from only 7.8 percent. During the same period, GM saw its U.S. market share drop dramatically from 35 percent in 1990 to 23.8 percent in 2007. And in early 2008, the unthinkable happened: U.S. consumers bought more foreign-made automobiles than ones made in America.
    Since the 1990s, faced with this onslaught of competition from Japan, GM and the other U.S. automakers have scrambled to offer incentives aimed at helping them hold on to their dwindling share. Heavily promoted with advertising, GM, for one, has offered cash-back incentives of between $500 and $7,000 to customers who bought their cars and trucks. For a long time the promotions worked brilliantly. GM’s sales were on the rise again.
    But in the long term the incentives only helped to dramatically erode GM’s profit margins and put them in a deep hole. In 2007, GM lost $729 per vehicle, in large part due to incentives. Realizing that the model was unsustainable, GM announced it would reduce the amount of the cash-back incentives it offered, and with that reduction, sales plummeted. No cash, no customers. The auto industry had effectively created cash-back junkies out of customers, building an expectation that there’s no such thing as full price.
    Whether it is “two for one” or “free toy inside,” promotions are such common manipulations that we often forget that we’re being manipulated in the first place. Next time you’re in the market for a digital camera, for example, pay attention to how you make your decision. You’ll easily find two or three cameras with the specifications you need—size, number of megapixels, comparable price, good brand name. But perhaps one has a promotion—a free carrying case or free memory card. Given the relative parity of the features and benefits, that little something extra is sometimes all it takes to tip the scale. In the business-to-business world, promotions are called “value added.” But the principles are the same—give something away for free to reduce the risk so that someone will do business with you. And like price, promotions work.
    The manipulative nature of promotions is so well established in retail that the industry even named one of the principles. They call it breakage. Breakage measures the percentage of customers who fail to take advantage of a promotion and end up paying full price for a product instead. This typically happens when buyers don’t bother performing the necessary steps to claim their rebates, a process purposely kept complicated or inconvenient to increase the likelihood of mistakes or inaction to keep that breakage number up.
    Rebates typically require the customer to send in a copy of a receipt, cut out a bar code from the packaging and painstakingly fill out a rebate form with details about the product and how it was purchased. Sending in the wrong part of the box or leaving out a detail on the application can delay the rebate for weeks, months, or void it altogether. The rebate industry also has a name for the number of customers who just don’t bother to apply for