Pricing in a Downturn

January 27th, 2009

Pricing decisions should be viewed not as Band-Aid

solutions for bleeding income statements but as part of a

long-term strategy for fiscal fitness.

- Reed K. Holden, Harvard Business Review

Strategic pricing in downturn

If your pricing strategy is more than a few months

old, it‟s already obsolete!

Three primary driving of pricing decisions:

Willingness to Spend: Consumers in all income brackets

reevaluate their price sensitivity

Competitor’s Prices: Competitors will be tempted to

wage price wars

Company Economics: Volatility will lead to cost

uncertainty and cause marketers to second-guess their

price and cost structures

Definition

Price

The amount of money charged for a product or

service, or the sum of the values that consumers

exchange for the benefits of having or using the

product or service.

What is Price?

Price and the Marketing Mix:

Only element to produce revenues

Most flexible element

Can be changed quickly

Common Pricing Mistakes

Reducing prices too quickly to get sales

Pricing based on costs, not customer value

General Pricing Approaches

Cost-Based Pricing: Cost-Plus Pricing

Adding a standard markup to cost

Ignores demand and competition

Popular pricing technique because:

It simplifies the pricing process

Price competition may be minimized

It is perceived as more fair to both buyers and sellers

General Pricing Approaches

Cost-Based Pricing: Break-Even Analysis and Target

Profit Pricing

Break-even charts show total cost and total revenues at

different levels of unit volume.

The intersection of the total revenue and total cost

curves is the break-even point.

Companies wishing to make a profit must exceed the

break-even unit volume.

General Pricing Approaches

Value-Based Pricing:

Uses buyers‟ perceptions of value rather than seller‟s

costs to set price.

Measuring perceived value can be difficult.

Consumer attitudes toward price and quality have

shifted during the last decade.

Value pricing at the retail level

Everyday low pricing (EDLP) vs. high-low pricing

General Pricing Approaches

Competition-Based Pricing:

Also called going-rate pricing

May price at the same level, above, or below the

competition

Bidding for jobs is another variation of competition-

based pricing

Sealed bid pricing

Remember the big picture

Volume

Too many firms fail to account for the effects of price on volume and of 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 ill will

and tarnishes your brand.

Impact on the industry

Price cuts not backed by cost reductions often lead to competitive counterattacks,

which erode profitability

Understand competitive advantage

Pricing should be shaped by industry position and

long term strategy

Price used as a weapon cuts both ways, don‟t hurt

yourself

Not everyone can be the “low cost leader”

If price is “all your customers ask for”, find new

customers who value something else

Leverage price segmentation

First class, business & economy = same

destination

Offer premiums for those willing to pay while

moving others „upmarket‟

Dynamic pricing based on (any factor you

like!) time, location, quantity, derived benefits,

perceived value

“The more you can slice and dice your prices and offerings without

affecting your brand, the more you can sustain profitability.”

- Eric Mitchell, Professional Pricing Society

Accenture reports

that a price

increase of just

1% can improve

operating profits

by 11% if sales

volume remains

constant.

Cost cutting can backfire

In 2002, Kimberly-Clark reduced

the number of diapers in each

package of Huggies in order to

improve margins. Procter &

Gamble could have followed suit,

but instead they kept their pack

size constant and added the

word “Compare” to the label. At

the same time, they increased

discount coupons and store

displays for Pampers, effectively

spoiling the pricing power of

Huggies.

Make products accessible with price

During the Argentinean economic crisis

of 2002, Unilever made it possible

for people to buy the Skip laundry

brand by making small packages

available, which carried a low unit

price. They also introduced large

economy sizes that offered people a

better deal.

Even if your brand is relatively high

priced, that high price, per se, need

not be a problem as long as people

believe your brand provides value

for money. Most people find security

in buying an established and

reputable brand. What you need to

do is make your brand accessible.

McKinsey &

Company Tailored

Pricing Approach

McKinsey &

Company Game-

Changing Pricing

Strategies

Careful with those budget cuts

Ogilvy & Mather Malaysia group managing director Zayn Khan says it is important

for companies to put in place a long-term plan covering three to five years,

including strategies for recession and post-recession recovery.

Most marketers make the mistake of taking a short-term view, which involves cutting

the marketing budget, because they consider the budget a cost that should be

sacrificed to “protect” other costs.

“Companies have to treat the marketing budget as an investment. It helps in building

brand equity and brand value in the long term,” Khan says.

It is good to maintain the marketing budget when rivals are cutting their budgets as

it is a way to emerge from the recession strongly, gaining market share as well as

improving profitability in the long run.

Research has shown that a company that cuts its advertising expenditure by 50%

during a recession year would take two years to recover its market share, while a

company that cuts its advertising budget completely in a recession would take

four years to regain its market share.

Pricing in a Downturn

Q & A

Need help after the presentation? Email dana@marketingsavant.com