Should you lower prices during a recession?

Remembering that perception is reality, we're headed towards a recession.  Whether we are or not.  Consumers believe it's coming...so they will behave accordingly. 

So we need to be ready to anticipate how this is going to alter their reaction/response to our marketing messages.  And, if they're right, we need to be mindful of our own budgets as well.

Last week, The New York Times ran a story about how many retailers are pushing the "lower prices" message to capitalize on consumers' fear.  The article documents several companies including the much written about Starbucks $1 cup of coffee.

Is this a good strategy?

Maybe.  It depends on your brand position. 

Are you the product or service that's all about being cheap?  Are you ready to live with that new brand position far beyond the recession?

A low price strategy is one that's easy to slip on and incredibly difficult to shrug off, once the economy turns around.  Consumers tend to really wrap their arms around a low price position and they aren't likely to be happy about going back to paying full price.

If your brand is not about price -- adopting a low price strategy is probably going to damage the work you've already done.  And that doesn't only apply to luxury or high end brands.

As money gets tighter, consumers will want to be confident in the companies they do business with.  Brand trust will become even more important, the tighter people are with their cash.

A recession is the time to be even more diligent about protecting your brand by staying consistent.  If you weren't a bargain basement brand a year ago, you should think long and hard before becoming one today.

Comments

[Jay Ehret]

Drew, I'm a firm believer in never lowering your prices. It messes with the whole price vs. perceived value equation. You can almost never recover from lowering prices because you can never raise them again. Customers now expect this new lower price to be permanent.

Instead, businesses should add value, not lower price.

[Drew McLellan]

Jay,

You will get no argument on that one from me. We too advocate that you price fairly...and then stick to your guns.

I believe that playing with your prices makes the client uneasy and gives them a reason to question your integrity. If you can afford to lower the prices -- why didn't you do it before?

Drew

[Noah David Simon]

sometimes though it is the low price guy who sticks to a rock solid price who is the real winner. When I work in marketing I always make sure that my price does not fluctuate... but I also make sure it is fair. I don't know how many time I got screamed at for selling something for $1200 that other people were sometimes selling for $2400 and sometimes $600. When penetrating a market sometimes keeping the price lower... BUT VERY CONSISTENT... and I mean on an anal level.

I was getting screamed at for months till I broke the company record for sales in a week. It created a lot of resentment... but we took the market.... and we forced our competitors who were more expensive and had a history in the market to lower the price. In the end the owner of our company was able to sell the product to the competitor because they thought we were damaging the market. People were buying our inferior product... because they wanted to save a few bucks...

The simple fact of the matter was that all the screaming in the world would not get the price of to $2000. I never quite understood what the big deal was...

and the truth was they weren't going to tell me. They had set up a commission based system... and in this situation a sales person is going to want to drop the price as much as possible.

None of us really understood the boss was trying to sell the company to the competitor from the get go. He wasn't interested in making money whatsoever... he was interested in proving that his product sold as at high a price as possible because it would make the value of the company sellable. If this were the case then he shouldn't of put us on commission. He should of paid us a flat fee. They actually thought they would bully me into cooperating...

Well Drew... they didn't know me well enough.

I LIKE SCREAMING... what's more is I will give you the heart attack.

SERVES THEM RIGHT!

[Karin H.]

Hi Drew,

IMHO it is the media that is selling us a recession (here in the UK anyway), not the real facts. (Had a tremendous January).

What if you, as a business, give in to fear of recession, fear of losing out on sales and lower your prices.
What if then the recession never materialised, but your normal turnover did? What happened to your bottom-line? And will you ever be able to 'crank' that up again?

All because of rumours and fear sold to us by the media.

Karin H. (Keep It Simple Sweetheart, specially in business)

[Lewis Green]

Drew,

I also am never if favor of lowering prices, excluding sales. Just a note about Starbucks: The small coffee has existed for as long as I can remember, but it wasn't advertised on the menu board because Starbucks was not interested in selling the small size, which carries reduced margins but takes the same amount of time to serve. All one had to do was ask for a small, and they received it. The price has always been about $1.00.

So Starbucks is not reducing prices on its coffee. It's simply marketing that smaller size instead of keeping it an insider's secret. I suspect the strategy is not about the state of our economy but instead reflects strong competition from Duncan Donuts.

[Drew McLellan]

Noah,

Sure...you can have impact being the rock bottom, rock solid price. I'm not saying it makes sense for everyone to be the most expensive.

What I am suggesting is that businesses tend to panic during economic downturns and that lowering your price for those reasons can have a long-term impact on your business' ability to survive and thrive.

Drew

[Drew McLellan]

Karin,

I think much of the recession is media hype here in the states too. But, as we know...perception is reality. So if people believe there is a recession -- from a marketing POV, there is one.

You ask the very questions that I hope a business person would ask themselves before they had a knee jerk reaction and just lowered their prices.

The costs are significant.

Drew

[Drew McLellan]

Lewis,

Interesting that everyone is acting like the $1 coffee will be the ruin of the Starbucks brand. Which is sort of what we're talking about here.

Again, perception is reality. You know a lot more about Starbucks than the average Joe. Do you think it will impact their brand?

Drew

[Lewis Green]

Drew,

Unfortunately, brand = perception, and the perception comes from the appearance that Starbucks is struggling because of at least three poorly handled strategic decisions:

1) Howard Schultz's concerns that Starbucks was losing its way should have been handled via employee voice mail or in manager meetings, not by e-mail memo, which went public.
2) The announcement of $1.00 looks like Starbucks is waving a white flag, when better communications that focused making the small coffee option more evident to customers would have made more sense.
3) The firing of the CEO, with Howard returning to day-to-day leaderships sends a message that Starbucks is in trouble.

Howard, got bad advice in each of these instances, assuming he asked for advice. And the Brand has suffered because of it.

[Marc Patterson]

Excellent topic, Drew. I also agree that lowering prices is not the way to go, especially in the marketing industry. I think a recession should be an exciting time for people in our industry. Our clients are suddenly competing for a piece of a smaller pie meaning we must really kick butt for them to continue eating. Clients will continue to pay non-recession prices if they continue to experience non-recession (or close to) sales. And to use a cheap cliche, a recession will seperate the marketing men from the marketing boys. :)

[Drew McLellan]

Lewis,

I'd love to see a post at your place (come back and give us the link) on...if Howard has sought your advice on those three items -- what would you have said to him?

Drew

[Drew McLellan]

Marc,

It will be an interesting ride for sure! I think this will also remind us that there are some who are well suited for our business and some who just really are not.

Drew

[Karin H.]

Isn't that true for any business type? It will also separate the retail men/women from the retail boys/girls ;-)

Every business type - products, service etc - should really think hard about what to do in times like this and I think the more creative you are (in the widest meaning of the word) how better you'll fare.

Karin H.

[Shama Hyder]

Hi Drew,

I have heard many independent professionals are also dropping their prices due to the recession they fear is at hand.

However, I am suggesting all my clients to INCREASE value rather than drop price.

Value based pricing is really the way to go in this instance.

[Ryan Karpeles]

If your best chance of succeeding is by slashing prices, you've got a 'value' problem - not a cost problem.

BTW, for the sake of discussion, what do y'all think of Wal-Mart's decision to drastically reduce its prices during this "recession?"

http://www.cnbc.com/id/22895676

Since they're already competing on low-cost, can this work for them?

[Drew McLellan]

Karin,

Yes....I think it is a crisis of faith, if you will, for all business people. How much do you believe in your product and your pricing model?

And if you don't have the faith -- you probably need to step back and ask some even harder questions of yourself.

Drew

[Drew McLellan]

Shama,

I'm not sure it is a matter of increasing value. Hopefully they are providing plenty of value for the fair price they are charging.

But, I think it is a matter of talking about and demonstrating the value that you do provide. Putting the spotlight on the value -- rather than needing to add more.

Drew

[Drew McLellan]

Ryan,

Now for Wal-Mart, reducing prices because of the "recession" is in perfect alignment with their brand. They are always "slashing, cutting, dropping etc." their prices.

So their announcement is consistent behavior for them. It supports their brand promise so I believe they are the exception to the rule.

What do you think?

Drew

[Ryan Karpeles]

Drew,

I agree that it aligns with their brand promise. Unfortunately it also perpetuates the notion that we're caught up in some sort of "Great Depression part 2."

From an economic perspective, I think it's a little silly and short-sighted. From a marketing perspective, I think it makes perfect sense.

Like you said - perception is reality.

Ryan

[Computer Consultants Kit]

Drew,

You're absolutely right. Companies that lack a decent value proposition or marketing plan are the first ones to run around like chickens with their heads chopped off during these kinds of times.

Cutting prices is EXTREMELY short-sighted for two reasons:

1. If you're not profitable at these lower price points, how will your company survive long enough? (Remember although cash flow is different than income, these same folks typically ignore cash flow projections as well.)

2. If your loyal customers get used to those lower price points, is there really a "plan" for raising prices when better times return?

Of course, these decisions will vary tremendously by industry and unique individual situations.

But in the computer consulting industry, system uptime didn't get any easier to manage just because the Fed cut interest rates.

Best,

Joshua Feinberg

[Barbara Bix]

Interesting question. Certainly the existence of a recession is not a sufficient reason to lower prices. Doing so, assumes that your clientele shops on price--which may or may not be true. So, find out first. What's happening to competition that's lowering prices? What's happening to those who don't? Has adjusting prices mattered in the past?

[Drew McLellan]

Ryan,

You raise a new slant on the discussion. If there is no recession but it is in Wal-Mart's best interest to advertise like there is one....to drive more traffic/dollars into their discount stores -- is what they are doing just good marketing or it is immoral to put people into more of a panic?

Drew

[Drew McLellan]

Joshua,

AND....having a plan to raise prices does not equate to your customers tolerating you raising the prices.

Once someone is accustomed to paying less -- they are very seldom going to support paying more.

Drew

[Drew McLellan]

Barbara,

An excellent set of questions for any business owner to ask themselves BEFORE they raise their prices.

Thank you for sharing them.

Drew

[Ryan Karpeles]

Honestly, Drew... I don't know. I think a lot of it has to do with intent.

If Wal-Mart believes we're in trouble, then it makes sense to help out their customers as well. If they're simply trying to sell more volume (and perpetuate this 'crisis') then I think it's wrong.

For the record, I'm not saying there's NO recession. I'm just saying it's being hyperbolized quite a bit (virtually all major indices were up in total for 2007, with downturns only in the 4th quarter and first month of 2008). It's also an election year. Which leads to uncertainty, which leads to scared markets.

From an economic standpoint, a downturn over four months is a tiny blip on the radar. But remember - the majority of consumers care deeply about the short-term. If Wal-Mart wants to please its customers, it must also adopt that viewpoint.

What about you? Do you think it's immoral or just smart business?

Ryan