Although dropping prices in the short runs would increase sales revenue in the short term, it causes numerous other factors that must be put into consideration. When concentrating on the long-term effects of a price drop there are many consequences that come into play. With a price drop during an economic downturn, its seems wise as it will boost short term sales, but when the economy begins to recover it will be difficult for the client to raise the price after selling at a lower price for some time. This is due to the customer’s reference price, which is the price that customers have in their head about what the product should cost depending on what they paid in the past for it or for competitor’s prices. If their reference price is the price drop that we are considering and they later come to find that the price has increased, they will not purchase the item, thus decreasing demand in the long term. Customer’s price sensitivity during economic down turns is increased which means they are looking for the best deal they can get, therefore if you lower the price of your product competitors may follow or represent their brand as having higher value. This increase in competition will negatively affect your sales as some competitors may be able to sell at a lower price.
Another consequence would be that a price drop may affect the customer’s perceived value of the product. Due to psychological pricing customers will interpret a lower price as lower quality of a product which may discourage some customers from purchasing at the proposed dropped price. Price cuts tend to have an adverse effect on how customers see the brand as price and brand image are closely tied together. This will either decrease the sales of the product as customer’s will have a lower perceived value or boost sales as customers believe they are getting a great deal. If it is to boost sales our