Friday, July 31, 2009

Pricing During a Recession: Some Lessons Learned from the 2008-2009 Recession – Part 3

(from Issues for Growth Vol.18, No.12)

Recently, we held a meeting with the CEOs and/or owners of two dozen of our clients across a variety of industries. As you might expect, some are experiencing very tough times, some are doing remarkably well, and most are holding their own. To a person, every one of them has a clear understanding of the tactics for the balance of 2009.

A number of them have downsized, management and employees have taken pay cuts and/or reduced work schedules, product lines have been streamlined,

As we discussed the measures and actions taken, it became clear to me that we collectively have learned or reaffirmed some basic management lessons during the past year that we would all do well to remember once the economic fortunes turn brighter. We had a lot of fun spending a couple of hours discussing lessons learned. Some of these will be presented in more comprehensive fashion in the next few Issues for Growth. - DPM

One big issue is what to do with pricing.

Pricing during a recession is a very controversial subject. If customers are not buying, the tendency is to reduce prices across the board to get customers to buy. Does it work? Research tells us that generally it does not increase volume. If folks are nervous about spending, they will still be reluctant to buy even with a discount. What happens is that you wind up selling to folks who would buy anyway, but at lower prices and lower margins. Companies that discount sometimes cause a cycle of expectations that takes years to correct.

It is far better during a recession to preserve pricing to maximize profitability and cash flow at lower volume levels.

Some Pricing Thoughts

* Discounting prices across the board does not increase volume; it only lowers profitability
* It may take as long as six years to recover pricing stability after broad-based discounting
* Discounting may devalue your product or service in the customer’s eyes
* More effective than across the board discounting is to price to change behavior.
- Buy one, get one at 25% off increases volume.
- Offer the upscale model and offer a discount off a companion product.
- Offer a slower selling model and offer a free component (e.g. buy a PC and get a free DVD or free software included)

What are your pricing strategies during the downturn? What is working? What is not working? Let us know your thoughts? Share your experiences.

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