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Pricing in a recession – how are you coping?

August 9, 2010

With the recession biting deeper and now talk of a “double dip” recession in America, companies turn to price cutting and special offers to generate sales. But is it really necessary? How do you price in a downturn?

The problems facing companies at the moment concern high staffing, inventory, customer cheque book closure, general market uncertainty and more. This means that companies have to work harder to convince customers and customers have to understand more the importance of the purchase. Justification of purchase is the name of the game right now.

Options open to companies trying to survive in this environment include: cutting prices; customer segmentation leverage; key account management; effective credit control; brand management and bundling strategies. Not forgetting awareness of your competitors.

Clearly, to be effective, businesses need to manage their finances so effective credit control and efficient resource procurement are key drivers to effective business. Manage costs and chase debts and you are some way to sanity. But these are simply management processes to render business efficient – if you’re not doing this already, then there is clearly a problem.

Which brings us to the key driver of business profits – the 80:20 rule or Pareto principle. Effective segmentation of your customer database to assess the most profitable clients is key. How many people are tied up with your customers? Have you allocated cost against them? Have you matched them against similar prospects to assess new potential?

But key accounts must not be taken for granted. In recessionary times, it pays to review all accounts and also review pricing models. It may well be, of course, that legacy pricing (especially key accounts) may no longer be relevant or that times have changed. It is important not to rely on inertia but to keep dialogue open lest a key account just drops you without reason. This is not an argument for price reduction but for value assessment and dialogue.

Such an approach brings into play the pricing tools of bundling and brand management. Customers can be acquired or retained by offering more value for incremental price increases. Or less of their existing product or service for a lower price. Those customers who are considering their suppliers will need to justify purchases via the DMU (decision making unit) within their firm so value will be crucial. Equally important will be an understanding of brand. Those suppliers with a stronger brand presence will have a greater chance when the chips are down.

So when pricing in a recession, it pays more than ever to have created a brand which is understood emotionally by new and existing customers alike. It pays to be able to offer product enhancements. It pays to be able to help reduce prices (provided this is offset by a reduction in service – a reduction agreed via dialogue). It pays to know your most profitable customers and the profile of prospective profitable customers. It pays to have a pricing matrix based on known profit per customer/account.

Which brings us to the last tool in the arsenal: price reduction. Regular readers will know that we don’t advocate price reduction for reduction’s sake. Few people buy on price alone, save for price buyers. You are not in the business of selling at the lowest price but at the most profitable price.

A price reduction strategy where products are sold at reduced margin is the last resort. Effective pricing in a downturn relies on knowing – and communicating – your value, your brand, and why people should choose you. Simple price reduction for no other reason than hopefully to increase sales is the route to meltdown.

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