7 Ways to Avoid Price Mistake Deals in a Downturn 🐰
Price mistake deals in a recession make companies lose revenues and customers.
During a recession, customers reduce their spending because they set more strict priorities. At the same time, businesses normally cut costs, lower prices, and postpone new investments as sales start to drop. Even marketing expenditures from communications to research are oftentimes reduced across the board. However, such haphazard slashing of prices is a big mistake.
“Before you think about slashing prices, think again”, says Nick Wreden, the author on strategic branding. He further explained that in the long run, a knee-jerk reaction to a downturn is not good for the business. It could even destroy your brand image.
Even though it’s clever to contain costs, not being able to support brands or look into customers’ changing needs can put performance at risk in the long term. Nonetheless, businesses that analyse customer needs, and quickly adjust tactics, strategies, and product offerings to address changing demands have a higher possibility in flourishing both during and after a downturn. Also, your pricing decisions should be based on clear strategic goals.
In this article, you’ll learn the 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 sins can appear to be less detrimental to strategy as the market tends to equalise and reset. But when the economy becomes unpleasant, an inappropriate pricing strategy can derail strategy, reduce profitability, ruin a brand, and distort markets and customer relationships.
How to Avoid Price Mistake Deals
When sales and revenues are decreasing and customers are asking for better deals, the impulsive response is to slash prices. This lessens customer complaints, helps in covering fixed costs, and buys time until such time that the economy recovers. Price reduction can also increase sales quickly, particularly when there’s no sufficient funds for product launches or other promotions. However, an automatic reaction to cut prices down may not be the best strategy.
Slashing prices may affect your company’s profitability when the upturn happens. Consumers may view your business as an easy prey for additional discounting. In addition, it may destroy your brand’s image. Pricing decisions should be part of a long-term strategy for financial fitness and should not be viewed as a temporary solution for suffering income statements.
Creating the right strategies will strengthen your business and more likely to achieve growth. To avoid a price cut and increase sales, follow the 7 guidelines below:
1. Consider volume, Impact on the industry and customer relationships
Profitability is not the only element included in pricing. Other factors that you need to consider are: volume, mix, cost and the effect of price changes on the industry and customer buying behaviours.
A lot of businesses do not consider the impact of price on volume and of volume on costs. In a downturn, trying to recoup these costs by price increase can be disastrous. Excessive pricing creates ill will and damages your brand. Similarly, Impact on the industry. Price cuts without cost reductions will destroy profitability.
2. Set dollar contribution goals for market segments, individual customers and products
Rather than setting sales goals, set dollar margin contribution goals for market segments, individual customers and products instead. Doing this may require you to invest in financial systems that can monitor customer demand, supply and direct costs. In addition, setting profitability goals means leaving market-share goals. Ultimately, having a big market share doesn’t mean increased profitability. However, shifting to profitability standards can help you go after other low-price companies if you wanted to.
Changing the basis for your pricing may also help. Many experts believe that value-based pricing is more effective that competition-based. Therefore, price your products based on the economic or psychological benefits delivered by your product or service. Take note however, it can also change when the economic climate changes. During an upturn, consumers often put a premium on your operational capability (i.e., you ability to maintain production capacity) to make sure there are no delays for their orders; or else, their sales suffer. But during a downturn, logistical services are more valuable.
3. Recognise your competitive advantage
Pricing should be shaped by long-term strategy and industry position in a recession. Cost-cutting can increase your market share if your competitive advantage comes from a low-cost structure, thus, positioning your business for a reward when the economy improves.
Examples of companies that use price as a weapon are Dell Computer, Southwest Airlines, and Wal-Mart, leaving their weaker competitors by the edge of the road. But remember to not use price as a competitive advantage for high-cost products by discounting to your best customers. This type of broad price action often destroys the base of profitable customers and decreases the likelihood for profitability when upturn occurs. Remember: it’s very hard to increase prices with customers once you’ve lowered them.
4. Maximise your segmentation tactic
Use tiered pricing to produce incremental revenue from your segmented customer base especially if you have high fixed costs. Emulate how airlines price using “first-class,” “business-class,” and “economy” pricing. For instance, first-class customers get extra value with little discounting; economy customers receive minimal value. This creates sales opportunities that can offset losses in other areas since oftentimes there’s little difference in production costs among the offerings. Furthermore, a premium offering can influence price-sensitive buyers to move up to midrange offerings to take advantage of additional value.
Offerings can also be segmented by location, time, 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 of Professional Pricing Society.
5. Keep your best customers happy
Keep your loyal customers happy. Reinforce them with loyalty programs or provide them additional services that will benefit them. You may also want to offer product training for your B2B customers to augment the value you offer customers. In addition, it will make your customers stay with your brand and not switch to your competitor.
However, don’t make the same mistake that businesses in the wireless industry did. Basically, there was a trend for a time for businesses in this industry to provide attractive deals to new customers. However, all of a sudden they all started to experience a spike in high churn rates and only realised too late that this was because they didn’t offer to their loyal and existing customers. Their customers found out they were paying higher prices than new customers and didn’t like it at all. In fact, they disliked the promotional campaign so much that they left. There must of been someone angry phone calls from customers..
6. Change the battleground
In negotiating with customers, aside from the payment, include other factors such as payment terms or ongoing training in the conversation.
You may also:
- Modify the volume requirement to lower unit costs and raise revenue.
- Bundle your products that improve customer value.
- Ask for a multiyear contract, in exchange for a discount, to smooth out your revenue and production variability.
7. Safeguard your brands because they offer justifiable margins
During a recession, brands are more valuable because they offer defensible margins. For example, sales of cosmetics often increase during a downturn. This is because high value brands represent affordable luxuries. What’s more, customers are willing to pay more when they get a psychological boost from products they buy. Thus, don’t reduce prices on your high-value brands during a recession. They can be sold even without discounts through channel promotions that increase visibility and appeal or simply by word-of-mouth.
When a recession happens, cut your production levels, set aside expansion plans for the meantime that aren’t really significant to your future growth, and reduce nonessential costs necessarily. This enables you to chase lower business opportunities that aid you in maintaining your cash flow without dramatically decreasing your production capacity.
Like the strategies discussed above, use some of these tactics to prevent price mistake deals:
- Think differently – don’t just do 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 – not just crude price rises across the board.
- Find niche or specialist pricing talent that can help you set up your pricing capability 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 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.
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