Managing Price in a Downturn

In an economic downturn the first question that comes to mind for most firms is “how do I keep my sales up?“ This question generally leads to one conclusion: lower price. This tactic is so pervasive that both marketers and consumers see it as inevitable. Consider retail consumption patterns in the fourth quarter of 2008; post-Thanksgiving sales were strong, but the remainder of the holiday shopping season was a disappointment. We blame this on the economy, and of course the downturn was a factor. However, actions by retailers exacerbated this effect, and the media joined in to play its part. Consumers anticipated unusually aggressive price cuts for Black Friday, retailers delivered, and the post-holiday sales period was shrunk to one day. This concentration of purchasing activity means consumers make fewer store visits, leading to fewer purchasing opportunities in brick-and-mortar settings, while e-tailers such as Amazon cruised along with strong sales for the entire holiday period.

And let us not dismiss these events as being limited to the retail environment. In any sales-driven organization, the knee-jerk reaction in times of stress is to lower price. And here’s what that tactic accomplishes:

• A potential price war. Anybody can lower price. If you do so, especially during a downturn, you can be confident that your competition will as well. In this scenario the firm with low-cost-producer status wins while consumers may win only in the short-run, as longer-term, profits go out of the industry and reduce product choice.
• A change in sales/customer mix. A price decrease naturally attracts the most price-sensitive customers, who may have very different profiles than your core customer base.
• A change in resource allocation. The change in the customer base changes the demands on your organization. Customers seeking, for example, higher service levels or innovation will be disappointed as you find yourself unable to allocate sufficient resources to these benefits given your price position.
• An increase in price importance and commoditization. This cycle will continue until all competitors are basically undifferentiated, at which point price will be the only attribute that customers relay on.

So what should you do instead? There is no question that the pressure to decrease price is always strong, and is strengthened during a weak economy. For sustainable growth, we must take a disciplined approach under these conditions.

First, we must think in terms of customers, not products. For sustainability, we must retain profitable customers, and product sales will follow. Take a hard look at your customer base and identify which customers will be crucial to your long-term success. Chances are these customers are the ones who value a key benefit that your company is skilled at delivering. These customers are the future of your organization.

Second, take steps to protect this core customer base so they will still be there when the downturn ends. Protect investments in your core competence and differentiating benefit. Do not allow pricing tactics to cut into the muscle of your firm.

Third, remember that whatever pricing moves you make as a reaction to sudden changes in market conditions must fall in the category of tactics rather than strategy. Permanent price changes come as a result of a well-thought-out strategic plan, whereas short-term reactionary price adjustments do not. To ensure that you can retain some flexibility to undertake price changes to protect your firm in the short-term without sacrificing your long-term strategy you need to manage the delivery of tactical price changes very carefully. Your pricing actions need to be consistent with reducing the importance of price for your core customers while increasing their perceived value of the benefits you deliver. You may be able to change the price/benefit equation without overtly changing prices by delivering “random” non-price rewards that enhance the transformational (not transactional) nature of the relationship with our most important customers. These rewards will often take the form of service enhancements that are ideally related to the core benefit of the product. In the retail case above, for example, a store might provide expedited delivery or personal shopping services to a preferred customer list during the holiday season.

The price we charge, in the end, is a symptom of the value we provide. Our goal will always be to enhance perceived value based on the benefit we deliver and then price accordingly. This approach works in both ups and downs in the economic cycle.

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