7 Ways to Avoid Price Mistake Deals in a Downturn 🐰
Price mistake deals in a recession make companies lose revenues and customers.
When sales and profits are falling and customers demand better deals, the first response companies make is to cut prices. This soothes customer complaints, helps cover fixed costs, and delay downfalls until the economy rebounds. A price cut can boost sales quickly, especially when there is no money for advertising or other promotions. This is what happens to prices in a recession.
Pricing decisions should not be seen as on-the-fly solutions for bleeding income statements, they should be part of a long-term strategy for fiscal fitness. When economic uncertainties hover, lessen your production levels, delay non-essential expansion plans, and enforce cut-costing measures wherever you can. This allows you to pursue low-value business opportunities that help you maintain your cash flow without really reducing your production capacity.
Before you think about reducing prices, think again. A knee-jerk reaction to the recession is never good for business in the long run, and could even ruin your brand image. Instead, make your pricing decisions based on clear strategic goals.
In this article, you’ll learn 7 ways to avoid making price mistake deals especially in a recession and maintain your brand image.
We argue that when times are good, pricing indiscretion can be easily forgiven. But when the economy turns south, a misguided pricing strategy can shrink profitability, warp customer relationships, and destroy a brand.
We strongly agree with other pricing experts that a knee-jerk reaction may not be the best pricing strategy in a recession. Price cuts often negatively impact your company’s profitability and make it harder to drive revenue when the upturn occurs. Aggressive price cuts can also encourage customers to ask for more discounts – thinking that you’re a sucker for giving them additional discounting they didn’t need or ask for. All of these factors, can cloud your brand’s hard-won image.
Profitability is not the only window in which you should view price mistake deals. Other important perspectives include:
Too many firms fail to account for the effects of price on volume and volume on costs. In a recession, trying to recover these costs through a price increase can be fatal. Impact on customer relationships.
“Sucker pricing” is the term that Eric Mitchell, president of the Professional Pricing Society (PPS), an Atlanta-based association of pricing and marketing managers, uses for the excessive pricing that occurs when companies have locked in customers through contracts or proprietary implementations. This creates animosity and tarnishes your brand.
2. Adjust your sales goals
“Don’t fight today’s sales wars with yesterday’s pricing strategies,” says Mitchell. Pricing teams experience what it calls the “coffin corner of costing” when, to make value-based pricing b2b, they overemphasise capacity utilisation and become willing to cut the price of high-value products. Instead of sales goals, set dollar contribution goals for products, market segments, and individual customers.
3. Understand your competitive advantage
In a recession, pricing should be according to industry position and long-term strategy. If your competitive advantage derives from a low-cost structure, cost-cutting can pump up your market share, positioning your firm for a payoff when the economy improves. But a common mistake is to use price as a competitive advantage for high-value products by giving away services or discounting to your best customers. You erode the base of profitable customers and reduce the potential for profitability when the downturn ends.
4. Leverage your segmentation strategy
Especially if you have high fixed costs, use b2b tiered pricing to generate more revenue from your segmented customer base. Strive for “first-class,” “business-class,” and “economy” pricing, the way the airlines do. First-class customers receive extra value with minimal discounting; economy customers get a minimum value. Such segmentation based on price sensitivity creates sales opportunities that can offset losses in other areas, especially since there is often little difference in production costs among the offerings.
5. Pamper loyal customers
Losing a customer now represents a double whammy: It drains customer equity and raises the cost of acquiring a replacement. Keep your best customers going back by bolstering loyalty programs or providing additional services. Consider offering product training or how-to programs for your B2B customers—not only will it augment the value you offer customers, but it will also make the customers think twice to switch to another provider.
6. Plug revenue leaks
Companies can run aground on pricing blunders once covered by the high tide of a good economy. A common mistake is not recovering all the costs involved in services, delivery, or other processes. Set minimum order quantities so that processing costs won’t eat all the profits. Strengthen your collection efforts to shrink the time between orders and receipt of payment. Without undermining customer value, establish a price menu for “free” services such as delivery or favourable payment terms. When sold separately, such offerings increase revenue opportunities. They also provide a benchmark value for customers who formerly discounted them because they were free.
During a recession, revenue leaks also occur because salespeople give in 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. They should also be based on the value to the customer. But sales forces often oppose value pricing because it usually means higher prices and a greater chance of walking away from price-sensitive deals. To encourage the desired behaviour, give them extra commission-based bonuses, not just on sales volume.
7. Protect your brands
Brands become more valuable during a downturn because they offer defensible margins. For example, sales of cosmetics often rise during a recession, notes Harvard Business School professor Nancy F. Koehn. The reason: They represent affordable luxuries or offer a psychological boost. So don’t cut prices on your premium brands during a recession; they can be sold without discounts through word-of-mouth or channel promotions that increase visibility and appeal.
Like the strategies discussed above, use some of these tactics to prevent price mistake deals;
- Think differently – don’t just don the same old broken things. Think outside the box. Find unique ways to increase profit in a downturn.
- Introduce new methods and technologies: b2b pricing examples like dynamic pricing – implement better techniques and value-based pricing b2b – not just crude price rises across the board.
- Find a talent that can help you do it properly – don’t just rely on project teams that don’t have the required capabilities – get help from experts or hire experts in their field to drive changes in your business.
- A large market share doesn’t necessarily mean increased profitability. But switching to profitability benchmarks can help you pursue other low-price business.
- Crafting the right strategies will not only strengthen your business now, but it will also prepare it for growth later. To bolster sales while avoiding a price cut’s dampening effect on long-term profitability.
- When times are good, customers often place a premium on you maintaining production capacity to ensure timely delivery of their orders; otherwise, their sales suffer. But in a recession, logistical services may be more valuable. That is giving the extra features in the product.
- Dynamic pricing represents an extension of such a segmented pricing strategy; here, prices shift instantaneously in response to changes in supply and demand. Although the practice doesn’t apply to every company, early testers of dynamic pricing software have been pleasantly surprised to discover how much more they can charge without affecting sales volume.
- Determining to increase or decrease your prices during a recession will depend on how the consumers will react to the adjustments. If too high, it will turn away your customers and label your company as opportunistic. Too low, it will be seen as an opportunity for them to tell you to lower more.
- Using other pricing methods like dynamic and value-based pricing b2b will give you better insight on how customers view your price if it is affordable or not.
- Affordable luxuries like cosmetics offer a psychological boost. So don’t cut prices on your premium brands during a recession. It cheapens the brand.
You can build up your business by using the right pricing strategy and maintain your brand image. Download this whitepaper to learn more.
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