Up, Down or Sideways? How to Price in a Recession

by Sara Clemence on June 5, 2009 in Entrepreneurship

alberta ferretti

Alberta Ferretti

The downturn has forced businesses large, small and in-between to rethink their pricing strategies. High-end designers like Badgley Mischka and Alberta Ferretti are lowering their prices. Monster Cable did the same. Restaurants around the country are reducing what they charge.

While slashing prices seems like an obvious way to hang on to revenue, it’s not necessarily the smartest one. Colgate-Palmolive and Procter & Gamble actually raised prices in the first quarter of 2009, betting that the increases would more than offset the loss in sales—and saw P&G saw its sales go up.

So which direction should you go in? There’s no one-size-fits-all strategy for pricing, even in a downturn. However, there’s one principle that applies to everybody, says Rob Docters, partner at Abbey Road Associates, a Connecticut-based boutique strategy consulting firm: “You need to be able to understand how the decision-making processes of your customers have changed,” he says. “If you don’t think, ‘What would I do in their shoes?’ you’re going to lose.”

You also need to carefully consider the state of your business, and your market. “Are you a cost leader?” says Jens Baumgarten, managing partner of the New York office for Simon-Kutcher Partners, an international pricing consultancy. “Can you afford to go for the lowest price or should you go for the value strategy?”

If you’re deciding whether to shift prices up or down, or take a more complex approach, the experts advise taking these factors into account:

Your costs: If you’re lucky enough to have a favorable cost structure, you might be able to lower your prices and emerge from the crisis stronger, Baumgarten says. “You may end up with higher market share because you were the only company who was able to do it.” But chasing the lowest price is risky—in every market, he says, there’s generally only a couple of companies who can pull it off.

Your bundle: Think you sell one product or service? You’re wrong. “You’re offering delivery of your widgets,” Docters points out. “You are offering warranties, follow-on repair service, financing. You’re probably offering upgrades.” Smarter companies are adjusting the prices in their bundle of services, in response to shifts in customer priorities. Since new machinery may be out of reach, for example, “You lower the price of the widget but you increase the prices of the servicing or the repair contract.”

Your brand: “If you’re Bergdorf’s or Porsche, it’s really, really important that you don’t panic, that you don’t undercut each other like hell and ruin your brand,” Baumgarten argues. Customers quickly adjust to lower prices, and will continue to expect them.

Instead, he recommends maintaining prices but increasing what customers get. “Give freebies and deliver more value for your customer,” he says.

Customers’ core needs: In good times businesses—especially B-to-B companies, fall into a cycle of over-engineering their products. “In a downturn they find they’ve added a lot of features that only a small segment of their customers want,” Baumgarten says. “In a situation where everyone is more price sensitive, it’s coming down on their heads.” A smart solution that many firms overlook is offering a stripped-down product at a lower price point.

There are many and subtle ways to change your pricing—like “hooking,” Docters explains. Amusement parks are a classic example of thinking farther ahead than your customer, to the point where they will be more willing to pay for things. “You have to spend $10 to go into the park, which is fine,” he says. “But you go in and, annoyingly, the best ride has a $5 price tag on it. Your kids are already lined up, and it’s very difficult to get them out of there.”  Same goes for the candy selection near the grocery store register, or even for tire warranties. Firestone may offer a 40,000-mile warranty on tires, but the tires don’t last that long. Drive into Firestone and tell them your wheels are shot, and they may offer you $10 a tire, since you’ve already ridden them for 30,000 miles. “But look at what they’ve done—they’ve gotten you into the shop with bald tires!” he says. “Smart is more likely to survive than dumb.”

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