Marketing and selling in tough economic conditions:

Pricing in a recession

Series by : Prasanna Perera, Marketing and Management Consultant, Chartered Marketer, CIM U.K.

Pricing a product or service in a recessionary economy is probably one of the most difficult tasks for a marketer.

The logic is quite simple - in a recession, the buying power of consumers diminishes and they aspire to purchase lower priced products and services. The result is that marketers are faced with declining margins. What can be done about this situation? I will endeavour to provide some answers.

* Do not price on costs but on value. A cost focus is an inward perspective, but a value focus is a market perspective. "Value" is defined as the perceived value a consumer believes a product or service provides.

For example, consumers may be willing to pay a higher price for a product, than the actual price, because they perceive the product to provide good value.

This provides marketers an opportunity to make higher margins, even in a recession.

* Avoid excessive discounting, since it affects the equity and value of a brand. Once, a price is discounted, it is quite difficult to increase the price again.

* Instead of discounting, examine the possibility of free issues, since it is more cost effective. A free issue provides sampling opportunity as well.

* Do not be afraid to take price increases, when the need arises. By not taking price increases on time, the subsequent increases can be substantial and hence the effect sales volumes drastically.

* Remember that there are no discounts but quantity discounts. Do not give discounts for single purchases. Remember that Sri Lankans by nature ask for discounts! Do not get trapped into this discount web.

* Cash discounts are ideal in recessionary periods, since money in hand today, is better than money in hand tomorrow. Cash purchases also enhances the liquidity of an organization.

* In a recession, price based promotions should be prudently used. We must not forget that pricing is a promotional tool as well. Link price based promotions with incremental sales.

* Liquidate slow moving and obsolete stocks by reducing prices. Slow moving and obsolete stocks are cash traps and this cash must be freed, specially in tight liquidity conditions.

* Keep in mind the psychological dimension of pricing. Lower priced products are perceived to be of poor quality, whilst higher priced products are perceived to be of higher quality. Market leaders do not necessarily market brands at the lowest price!!

* Watch out in granting credit facilities to customers, since the cost of capital is very nigh. Granting credit runs the risk of customers defaulting payments and bad debts. (Businesses simply cannot afford this in the present context).

* Do not grant excessive margins to distribution intermediaries. This inflates the end price to the consumer and makes the manufacturer poorer. Balance the push and pull aspects of your marketing strategy.

Pricing is undoubtedly a critical element in the marketing mix.

However, do not go overboard and start discounting based on the belief that customers are always bargain hunters!! Understand your customers buying behaviour and develop your pricing strategies accordingly.

An equitable balance between manufacturer margins, retail margins and customer value must be maintained.