Pricing in a Down Economy

What message are your sending?

In a difficult economy, the natural tendency is to lower prices in an attempt to retain as much business as possible.  Is that a good strategy?  Intuitively it makes sense; yet I’ve often found that the counter-intuitive approach - the one that is the opposite of what our natural tendency suggests - produces better results.  Does that hold true for pricing in a challenging economy?  Let’s take a look.

Lowering prices

We’re all buyers so we don’t have to look far for reactions to the pricing decisions.  What’s your impression when businesses you frequent lower their prices?  Have you wondered:  

• Have they been getting in my knickers all along?
• Are they desperate for business?
• If I buy from them, can I count on service after the sale?
• Are they cutting quality or quantity to lower their price?  If so, are they doing so without telling me?

I doubt that any of you want to plant these questions in your customers’ minds, yet that’s exactly what you’re doing when you lower prices without getting buyers to make concessions as well.  Let’s contrast that with companies that hold their prices in a down economy.

Holding prices

What impression do you have of businesses that keep their pricing constant?  Do you feel that:

Indeed, isn’t this the message you’d rather send to your market?  What about the really confident companies - those that raise their prices?

Raising prices

What reactions do you have to price increases from companies you frequent?  Do you feel that these business owners or leaders are:

•  Arrogant?
•  Uncaring?
•  Unaware?
•  Just plain stupid?

Or do you find yourself paying the price anyway?  My experience has been that price increases during a difficult economy are often modest and that customers continue to buy regardless of the increase.

Some companies use this strategy, raising prices in a down economy, to eliminate unprofitable customers.  There’s an old adage that says “80% of your customers produce 120% of your profits.  The other 20% of your customers cost you 20% of your profits?”  In the 20 years I’ve been providing consulting services to businesses, I’ve helped many of them increase their bottom line by reducing the top line - their revenues.

Buying habits

While people’s buying habits change during a difficult economy, they don’t often change in ways that we’d expect.  Buyers continue to pay whatever price is asked for things they really want.  I’m sure that many of you have driven through a trailer park and seen a really old, dilapidated trailer that had a brand new $30,000 pickup in the driveway.  Or you’ve driven through an older subdivision comprised of 900 square foot homes with a $150,000 RV sitting in the drive.  Buyers spend huge sums of money on things they really want - good times or bad.  

If buyers are going to cut back, they’re going to do it on things they need, not those they want.  That’s one of the reasons why Walmart and Costco have fared so well in this economy.  Buyers are looking for lower prices on the necessities.  

Had it not been for the downturn, it’s unlikely that WalMart would have fared so well.  Why?  They’re in the midst of changing from a low-price strategy to one that’s ostensibly designed to compete with Target.  If you doubt that there’s a shift afoot, you need look no further than change in their tagline from “Always low prices, always” to “Save Money. Live Better.”  

I know that some of you are thinking “Yes, but buyers are also postponing purchases of what they want.”  That’s true.  My question to you is “How much do you have to discount  your offerings to get them to buy now and what does that do to your ability to recover as the economy rebounds?”  As a CPA, I am required to get forty hours of continuing education each year to keep my license active.  During a break at a CE seminar, I spoke to the presenter.  He told me that one of the CPAs in an earlier class said that his firm wasn’t going to lower rates this time.  The last time they did it took them five years to recover.  Are you willing to put that much of your future at risk?

For those of you who are thinking “Dale, if I don’t lower prices now I won’t be around for the recovery.”  If that’s true, and I sincerely hope you’ll challenge that belief with several trusted advisors, then wouldn’t you be better off limiting your losses by getting out now rather than adding to those losses with lower prices?

If you’re considering lowering prices, I encourage you to think about the message you’re sending to the market.  It may not be the one you intend.

Copyright © 2009, Dale Furtwengler, all rights reserved