We're all hoping that the days of a recession are way behind us now but it certainly does no harm to be prepared in case the economy becomes rather less stable, particularly, for example, during this Brexit negotiating period – and beyond.
During a downturn, when your sales are wobbling, what's the best way to handle the situation? Do you instinctively cut prices to keep your customers satisfied in the short term?
Certainly, a price cut can quickly boost sales but pricing experts agree that such a knee-jerk reaction may not be the best pricing strategy. It can signal to customers that you're easy prey for additional discounting - and it may harm your brand's image when better times return.
"Pricing decisions should not be viewed as Band-Aid solutions for bleeding income statements", says Reed K. Holden, president and CEO of Strategic Pricing Group in Waltham, Mass., and co-author (with Thomas T. Nagle) of The Strategy and Tactics of Pricing.
Rather, pricing decisions should be part of a long-term strategy for fiscal fitness. Price cuts not backed up by cost reductions often lead to competitive counterattacks, which will definitely erode your profitability.
There are strategies (other than pricing) that can stem a downward spiral:
a) you can trim production levels
b) postpone non-essential expansion plans,
c) cut all non-essential costs wherever possible.
In addition to the above, consider these tried and tested pricing strategies to see you through a downturn:
Use a Value-Based Pricing Strategy
"Don't fight today's sales wars with yesterday's pricing strategies," says Eric Mitchell, president of the Professional Pricing Society (PPS). When the economy changes (either up or down), so must your pricing strategy.
It makes sense to change the basis for your pricing. Most pricing experts believe that pricing based on value (the economic or psychological benefits delivered by your product or service) is much more effective than a competitor, cost, or customer-driven pricing strategies.
Be aware however that the basis for customer value can shift when the economic climate changes. When times are good, customers often place a premium on your maintaining production capacity to ensure timely delivery of their orders. In contrast, during a recession, logistical services may be deemed more valuable.
Implement a Segmentation Pricing Strategy
Especially if you have high fixed costs, use pricing to generate incremental revenue from a segmented customer base. Implement "premium," "standard," and "economy" pricing. Premium customers receive extra value with minimal discounting whilst economy customers get minimum value.
Such segmentation based on price sensitivity creates more sales opportunities that can offset losses in other areas, especially since there is often little difference in production costs between the different offerings. In addition, a premium or standard offering can motivate price-sensitive buyers to "move up" in the pursuit of additional value.
"The moment you make a mistake in pricing, you're either eating into your reputation or your profits." Katharine Paine - Measurement, Insights and Analytics Consultant at Paine Publishing
Purchase Dynamic Pricing Software
Dynamic pricing is an extension of a segmented pricing strategy when prices shift instantaneously in response to changes in supply and demand. A dynamic pricing strategy presents your customers with differing prices according to time, location or purchase quantity.
"The more you can slice and dice your prices and offerings without affecting your brand, the more you can sustain profitability," says Eric Mitchell. Although the practice doesn't suit every business, companies that use dynamic pricing software will be fortunate to discover how much more they can charge without affecting sales volume.
The consulting firm Accenture has reported that a price increase of just 1% can improve operating profits by 11% if sales volume remains constant.
Keep Customers Loyal
You definitely don't want to lose your most loyal customers during a downturn because the cost of acquiring replacement customers will be very pricey. Keep your best customers on side by bolstering loyalty programmes or providing additional services and attention.
Consider offering product training or other classes for your B2B customers, which will not only augment the value you offer your customers, it will also make it more difficult for those customers to switch to a competitor.
Stem Revenue Leaks
A common oversight is not recovering all the costs involved in service, delivery, or other processes, says Eric Mitchell. Set minimum order quantities so that processing costs won't erode all your profits. Improve your invoicing efforts to shorten the time between fulfilled orders and receipt of payment.
Without undermining customer value, establish a price "menu" for what were previously free services such as delivery or favourable (to the customer) payment terms. When sold separately, such offerings increase revenue opportunities. They also provide a benchmark value for customers who formerly dismissed them because they were free.
In a recession, revenue leaks also occur because your sales force becomes less resistant to customer pressures. They knock down the price until the sale is won, despite the impact on profitability. Ideally, prices should be negotiated based on business rules - volume, delivery, financing - and not according to the negotiating skills of your customers.
They should also be based on the value to the customer. Your sales force may oppose value pricing because it usually means higher prices but in order to encourage the desired behaviour, compensate your sales force based on their contribution to your profitability and/or customer equity, not just on sales volume.
Improve Negotiating Skills
When you or your sales force negotiate with customers, include additional factors that are in your favour. For example, payment terms or ongoing training. Additional suggestions are:
- Change the volume requirement to raise revenue and lower unit costs.
- Bundle products that increase customer value.
- In exchange for a discount, ask for a multiyear contract to smooth out your revenue and production variability.
Protect Your Brands
Brands often become more valuable during a downturn because they offer defensible margins. For example, sales of cosmetics often rise during a recession, writes Harvard Business School professor Nancy F. Koehn in Brand New because they represent affordable luxuries or offer a psychological boost.
So don't cut prices on your premium brands during a recession because they can be sold without discounts through word-of-mouth or channel promotions that increase visibility and appeal.
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016