News

Iditarod Economics: Don’t Cut Your Prices

It turns out, the business of running dogs competitively through hundreds of miles of snow and ice is no different from any other business these days: It faces the pressures of rising costs and global market forces. And it must resolve the same dilemma of whether to cut or raise prices in response.

The recession has come to the Iditarod.

In an Associated Press article in today’s New York Times, the Iditarod Trail Sled Dog Race came under fire from racers balking at the organization’s $1,000 increase in the entry fee over last year, upping it to $4,000. The article nicely outlines the economics of dog-racing, from the $30,000 costs of training and supplies to the $610,000 purse – distributed among the top 30 finalists and down from $935,000 last year  – and the rising, now $1.8 million, cost of putting on the race.

We’re not talking about huge total revenue or operating margins for anyone in this case, but the tension represents something business owners everywhere are facing: Despite a drop in customers’ disposable income (or willingness to dispose of that income), should price-cutting be considered?

Norm Brodsky, an entrepreneur and a columnist for Inc. magazine, says that that’s pretty much the worst thing a business owner can do, even in a downturn. In his March issue column, “Surviving the Recession,” he writes, “Yes, some businesses will go under, but some companies will emerge stronger. If you want yours to be among the latter, you need to be careful about which costs you cut and which deals you offer your customers.”

Drew McLellan, who runs a marketing agency in Des Moines, Iowa and writes a blog, also notes that lowering prices is a poor business strategy: “Consumers tend to really wrap their arms around a low price position and they aren’t likely to be happy about going back to paying full price.” It can take years to retrain them to accept higher prices.

It’s hard as a consumer to fully advocate such a thing, since we will still be on the hunt for better bargains (see Wal-Mart’s 5.1 percent surge in revenue in February). But if the goal is a healthy economy, slashing prices to below-water levels that crush companies’ ability to cover their operating costs is going to leave us with fewer companies, a smaller economy and a longer recession.

Tags: business, iditarod