Pricing in a Recession

Pricing for Value

Session 14
Elkana Ezekiel
 IMPORTANCE OF PROPER PRICING DURING A
RECESSION
Price cutting is very tempting in times of low sales and customer pressure

◦ can boost sales quickly, even in the absence of advertising & promotion

◦ helps cover fixed costs

◦ silences customer complaints

◦ helps buy time till the economy recovers

But wrong pricing during a recession can

◦ shrink profitability - when the economy rebounds, it will be difficult to take up prices again

◦ warp customer relations - they learn that you are an easy prey for additional discounting

◦ sometimes even destroy a brand - can have a strong negative impact on the brand’s image
ACTION STEPS – MUST DO
Trim production levels to match lower demand
Postpone investments & expansion plans that aren’t absolutely vital
for future growth
Slash non-essential costs wherever possible
Slice & dice your offerings and prices without affecting your brand
Doing this creates resources to pursue customer value relevant
business opportunities & maintain cash flow without drastically
reducing your production capacity
 KEY PRINCIPLES OF MANAGING PRICING IN
A RECESSION
1. Remember the big picture

2. Adjust your sales goals

3. Understand your competitive advantage

4. Leverage your segmentation strategy

5. Pamper loyal customers

6. Plug revenue leaks

7. Shift the battleground

8. Protect your brands

REMEMBER THE BIG PICTURE
Profitability is not the only prism through which pricing should be viewed

Other perspectives need to be kept in mind:

1. Volume - as volumes reduce, costs rise, especially for industries with high
fixed costs. Trying to recover these costs through a price increase can be fatal

2. Impact on customer relationships - sometimes companies give discounts to

new clients who negotiate strongly, while retaining higher prices to existing
loyal customers. When these customers find out, it creates ill-will & tarnishes
your brand

3. Impact on the industry - price cuts not backed by cost leadership can
eventually erode profitability of the entire industry
 ADJUST YOUR SALES GOALS
Sales goals set in good times may not be viable during a recession

◦ Yet managers over-focus on capacity utilisation and try to meet these goals by cutting prices of even high-
value items

Instead of sales, can set dollar contribution goals for products, market segments & individual customers

◦ Setting these profitability goals may mean abandoning market share goals

Change the basis of pricing to value

◦ basis for customer value can shift during recessions

◦ example - in good times, the customer places premium on maintaining your production capacity to not
lose or delay orders. This may not hold true in a recession.
 UNDERSTAND YOUR COMPETITIVE
ADVANTAGE
In a recession pricing should be driven by industry position and long term strategy

For companies like Wal-Mart, Dell, South-West Airlines whose competitive

advantage stems from a low-cost structure, reducing price & costs can pump up
market share and strengthen their competitive position for the long term

But using price like an advantage for high-value products by excessive

discounting/giving too many free services to your best customers is a mistake as:

◦ it erodes the base of profitable customers

◦ reduces the potential for profitability once the recession ends

 LEVERAGE YOUR SEGMENTATION
STRATEGY
Segmentation based on price-sensitivity can create sales opportunities that can offset losses in other areas

◦ especially because there is normally no significant difference in production costs between different products

Strive for an equivalent of airlines pricing:

◦ First class customers - receive extra value(on-site service, rush deliveries)with minimal discounting

◦ Business class - good value, some discounting & unbundling of services

◦ Economy class - minimum value, no extra services

Slice and dice your offerings in as many ways as possible, while ensuring no impact on brand

◦ segment by time (peak load time purchase vs. non-peak); location(door delivery vs. customer pick-up); quantity
of purchase

◦ adopt dynamic pricing models where prices shift instantaneously in response to changes in supply and demand
 PAMPER LOYAL CUSTOMERS
Losing a customer drains customer equity & raises the cost of acquiring a replacement

Keep your best customers happy by

◦ bolstering loyalty programs

◦ providing additional services like product training for B2B customers

Such initiatives will make it more difficult for customers to shift to competitors

Impact of not taking care of existing customers - when the US wireless industry gave
attractive deals to new customers but did not provide them to existing ones, the churn
rate in the industry increased significantly
PLUG REVENUE LEAKS
Set minimum order quantities so that processing costs(services, delivery etc.) do not
eat up all the profits

Strengthen collection efforts to reduce the time between orders & receipt of
payment

Establish a price menu for “free” services like delivery or favourable payment terms

◦ when sold separately, they can help increase revenue

To deter sales people from over-discounting, modify the incentive structure to

encourage the desired behaviour e.g. contribution to profitability, effectiveness of
selling at the targeted prices etc.
SHIFT THE BATTLEGROUND

Include other factors besides price in negotiations e.g. payment terms,

training etc.
Bundle products that increase customer value e.g. GPS free with car
In exchange for a discount, try to tie-up multi-year contracts, which helps
smooth out your revenue and production variability
PROTECT YOUR BRANDS’ CORE
PROPOSITION

Brands actually become more valuable during downturns, as they offer

more consistent demand as well as defensible margins
Sales of cosmetics are seen to rise during recessions, as they are seen as
an affordable luxury, or offer a psychological boost during tough times
So, do not cut prices on your premium brands during a recession
◦ instead drive sales through channel promotions that increase visibility
and brand appeal
THANK YOU