Pricing in an Upside-Down Economy

By Ken Westray, PE, NPDP

Classic marketing economics says that supply and demand are the drivers of product price. When demand is up, product prices should increase. By contrast when demand decreases, product prices decline until demand bounces back.

How do you break this cycle of boom and bust? Sadly, most business advice being given today seems to be based on yesterday's knowledge and logic.
 
The major rules of thumb are simple:

• Keep revenues flowing (reduce price) and
• Manage margins (cut costs) to gain profit.

Let's look at three different scenarios and what we can learn from them.
 
Reduced Demand
 
Company A, a high-end jewelry retailer, has seen sales drop by over 50% and if the trend continues, the company will have to close its doors. Though gross margins are excellent, the problem is that the decline in revenues will not cover the fixed operating costs of the business. Ouch! A key buying season is approaching and maintaining profitable revenues is a must. But with market demand down individual unit sales will be down.
 
The classic business response is to reduce price and hope to sell enough to cover operating costs. However the issue is reduced sales demand, which may suggest a different, new product approach. In a recession, creating a new product that delivers a tightly focused value statement at a much lower but profitable price point can result in greater success.

Insight 1: Counter-Attack --- Launch a new product line that can provide value at the new price levels. This step did result in recapture of nearly 50% of lost revenue.
 
Heavy Discounting
 
In many cases price pressure intensifies as a recession continues. A service sector company found that its competition responded by heavy discounting. The company fought to defend its market share by doing everything possible to find new revenues in new places to replace overall declines from reduced demand. This traditional step caused greater competition on broader fronts diluting the company's efforts.

Insight 2: Counter-Attack --- Instead change the game by creating a new product by adding more services to your product offering with features that your customers can use, while maintaining current price levels in your core market.
 
Recessionary Marketing
 
Both of the above scenarios are good examples where recessionary new product development has been put to good effect. However there is another best practice... GREAT MARKETING! A number of consumer products companies who recently introduced new products were able to push through 5-8% price increases in the 4th quarter 2008 against intense pressure from the big box retailers.

Insight 3: These companies had a great understanding of their value proposition and the courage to use this information rather than bending to emotional pressure. 
 
Lastly, maintaining new product development activities are still fundamental to business success. However, a recession demands a more innovative response to new product development than the standard approach. Remember the "box" may have moved but new products are still a key success factor.