What is a Distress Price?

A distress price is the rate at which a product is sold as an alternative to discontinuing the product. This price is typically used when the demand for a product has fallen dramatically. This situation can arise when customer tastes have shifted or competing products have entered the market. A company may choose to employ distress pricing rather than stopping production when it can still set a price point that covers the variable cost of production, plus enough of a margin to pay for some of the entity's fixed costs.

Advantages of Using Distress Pricing

There are several advantages associated with using distress pricing, rather than shutting down the sales of a product or service. They are as follows:

Avoid shutdown costs. Continuing to sell with distress pricing allows a business to avoid shutdown costs, such as paying severance to employees or paying government fines. It may also give the business time to re-orient itself toward other markets.
Maintain market share. Distress pricing allows a business to maintain or increase its market share, which may be valuable when competitors decide to exit the market. This can be useful, if the absence of competitors later allows the company to increase its prices and thereby earn a profit.
Retain in-house expertise. By using distress pricing, a business can retain the in-house experts associated with the products and services being sold. These people may be quite valuable for other purposes, such as a re-orientation into a different market.