Tuesday, August 12, 2008

Case Study: How to lose customers

As I read the Wall Street Journal yesterday I came across an interesting article on the Opinion section of the paper. Its title: Cigarette Tax Burnout.

Smoking is a big business, whenever I asked a smoker why he/she smokes the answer is "I like it" or "it relaxes me". Anyways, even though I am not a smoker and I personally consider smoking as burning money away (literally), I believe smokers have a right to smoke. Now, they buy a product that is heavily taxed by state governments, the government states the tax on cigarettes funds other projects and many smokers are OK with paying some taxes, however, politicians need to take a business class to teach them the basics of Price and Demand. Politicians think the increase in the tax on cigarettes does not have any effect on the demand, but now they are learning that it does.

This is a perfect example on how you can price yourself out of business... the government increases the tax on cigarettes, smokers buy less cigarettes, cigarette companies report less profit, share holders make less money, employees may work less hours and state governments have less money to balance their budget or fund other projects.

"Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland's budget. Last year the legislature doubled the cigarette tax to $2.00 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again."

Here is the link for the full article.