ADVERTISEMENT

Hip, Hip, Hooray, the Recession Is Over … Long Live the (Weak) Recovery

October 2009 Pricing

By most indicators, the major economies of the world are coming out of the deepest global recession a lifetime.  Yet, the recovery is far from a return to pre-recessionary trends.  Executives might be hoping for return to strong growth, yet most of should expect a tepid climate at best.

From a pricing perspective, the weak recovery will place pressures on firms to demonstrate that they are better positioned than their competitors to grow.  This demand for demonstrating growth, rewarded by higher stock valuations, may drive executives to grab market share through deeper discounts and promotions.  Alternatively, executives may be hoping to grab a higher value market segment by marching up the price to benefits map.  Yet, evidence indicates that executives should apply pressure to the marketing levers differently if they want to win in this period of a weak recovery.

Restrain Those Discounts

First, executives must continue to restrain their discounts, if not decrease their discounting and price promotions during this period.

Research by Losish and Mela has indicated that companies routinely overweigh the importance of short-term share gains and under weigh the importance of their brand’s value proposition.  “They … overinvest in price promotions and under invest in advertising, new product development, and new forms of distribution.”

One of the challenges of heavy price promotions and discounts is that they train customers to buy on price, not on quality.  If the company spends most of its time communicating to customers that they have the lowest price, it is only natural for customers to become convinced that price is the most important decision criteria in making a selection. From a rational viewpoint however, price alone is not the appropriate buying decision metric.  The more appropriate metric is price to quality.  If an executive wants customers to buy on quality, then they better point out the value of their products and the deficits of low price / low quality offers.  For example: good boots last years while bad boots last months.  On a dollar / month of wear, customers are usually better off buying quality boots.

A related challenge to industries plagued with heavy price promotions is the erosion of customer loyalty.  Customers trained to purchase on price promotions will also be trained to consider brands to be interchangeable.   From a customer value perspective, the costs of acquiring new customers are far greater than the costs of retaining a customer.  Executives should be wary of actions which reduce customer retention rates within their industry.

Finally, discounts, price promotions, and trade deals can all encourage unproductive economic activity.  At one point, it was estimated that one-third of all expenditures on trade deals were wasted through the effect of inefficient warehousing and distribution.  In tight economic times, neither manufacturer nor their retail partners can afford to waste money on storing goods.

Rather than pursuing a greater discount and price promotion budget, now might be the time to switch to value pricing and shift budgets towards branding, specifically online branding.

Focus On Low-Cost Targeted Solutions

During good economic times, a common business strategy is to add value to products at a rate faster than costs increase.  Simply witness the strategy of any Trump property development to validate this claim.  During this weak recovery, this common strategy is unlikely to prove as profitable.  Customers simply don’t have the excess revenue and income to spend on unnecessary benefits.  Instead, firms should focus on uncovering quality solutions which satisfy a targeted need at a low-price.

Excess capacity, slack labor markets, and overall uncertainty regarding future earnings of both consumers and industrial customers all imply that pressure will still be on low-price solutions to daily operations.  Rather than delivering gold-plated solutions, firms should focus on delivering targeted solutions for specific needs of customers to continue competing and surviving in a tougher economic climate.

Product development should continue to be undertaken, but rather than creating new products at the top of the price to benefit map, firms are more likely to profit from segmenting the mass market at the lower ends of the price to benefit map and delivering the specific products that this larger group of customers demand.

Mergers & Acquisition Season Has Started, Come Out on Top

These prescriptions are not new.  Many have been proven through research, practice, and corporate survival rates.  While the executive that promotes these strategies within their firm is likely find stiff resistance from other executives, peer resistance does not let the responsible executive off the hook.  Use the peer case studies and logic to support your position, and it is highly likely you will survive this recovery a winner.

Recessions come and go.  Weak recoveries can turn into strong recoveries.  To paraphrase Winston Churchill:  Never, never, never, never give up.

References

Leonard M. Lodish and Carl F. Mela, “If Brands Are Built over Years, Why Are They Managed over Quarters?” Harvard Business Review (July-August 2007): Reprint R0707H.

Paul Flatters and Michael Willmott, “Understanding the Post-Recession Consumer,” Harvard Business Review 87, no. 7/8, (July-August 2009):  106-112.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
More by Tim J. Smith, PhD