Pricing during a recession or economic downturn or recession is tricky, requires considrable thought and is fraught with dangers.
The right pricing, however, can help a company compete and even thrive during difficult economic times, according to Reed Holden and Mark Burton. The two men are advisors on pricing to B-to-B companies.
- Don't panic. Panic pricing leads to lower profits, especially in a recession. If you get desperate to close deals, chances are lowering prices won't help. In fact, this behavior shows customers you are nervous and might be a problem supplier.
- Develop a flanking product/service. If you have the capacity in a downturn, develop a lower-value service or product that can be used to meet the needs of lower-value customers. Be very careful not to drop prices of your high-value offering. And make sure that the customers who pay the lower prices don't get access to the fast delivery or higher-quality products-even if they complain.
- Price with confidence. Just because it's a recession doesn't mean your existing customers won't value your products and services. If they need to cut prices, give them the lower-value offering. If they are in trouble, take care of them. But remember that even in a downturn, you are delivering value in your offering. Recessions don't change that.
- Know when to say NO. Just because a customer asks you to quote on a piece of business, either directly or through an RFP, doesn't mean you have even the smallest chance of winning it. Customers will often include second-tier suppliers into an RFP to act as a "rabbit," an agent who is there to drive the prices of the preferred competitors down. Don't waste your time, even if you are desperate for business. Getting involved in a series of quotations will drive prices down and eliminate profits at the account. Recognize that before you start the process.
- Be opportunistic. If you discover that a new or occasional customer is desperate to do business with you, be available to service their needs. But make sure you know what the other competitor did wrong. Ask lots of questions about how you can help, and have a good understanding of the value you will bring to the relationship. Above all, keep prices high and don't let purchasing agents drive prices down.
These two advisors on pricing argue that during a recession, a company may be tempted to reduce prices in order to sell more or hold onto market share. In doing so, company managers will accomplish two things--neither of them good.
- In a mature/declining market, the right pricing strategy is a neutral one, that is, don't drop prices to try to solve the problem. This will only cause price wars, eliminate profits, and cause revenues to decline further.
- Dropping prices reduces levelss on your high-value products and services rather than selling more low-value products and services. That causes the first problem to worsen, and when markets begin to pick up, managers struggle to get prices of their high-value products up again.
Reed Holden, DBA, and Mark Burton are leading pricing authorities and co-founders of Holden Advisors (holdenadvisors.com), a consultancy that works with business-to-business firms to design and implement value-driven pricing strategies that increase profitability in highly competitive markets. They are coauthors of Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table (John Wiley & Sons, 2008).