The important consideration is to try to maintain sales, even if some of them yield marginal or no profit (i,e, break even). In other words, so long as you are covering your costs, particularly fixed costs, then there is value in doing so.

However, unless you wish to become the low-cost leader going forward, then this low pricing may create a precedent which customers expect to continue, and it also may devalue the brand.

So pricing strategy must be decided carefully, with all things considered, including unintended consequences. And it may be better to have various incentives rather than simple price cuts in order to sustain sales.

In the article “Pricing in an Inflationary_Downturn”, McKinsey recommends the following actions:

-Watch for sudden shifts in price structure
-Adjust to changing customer needs
-Monitor customer-level profitability
-Update price sensitivity research

Many companies across the nation are on the verge of closing their doors and some have already started liquidating their inventory. This can be a great time to create opportunity for your business. Here are a few items to look at:

Item 1: Renegotiate Your Vendor Pricing:

Go to your current vendors and request price decreases due to the economy. You may be able to receive your inventory at a fraction of your old rates because of the risk of your vendors losing their business. Most agreements can be negotiated when financial conditions are more abundant ….. so this provides the perfect opportunity to turn the financial crises into an opportunity for your company.

Item 2: Create A Customer Loyalty Program:

Many companies started slashing prices to attempt to drive additional business to their company. However in researching the response of the consumers you may find them upset because if those prices were always available why did they not get them before. So you may consider creating a customer loyalty program ….. send a letter and give fliers to every customer saying that you want to retain them as a customer and are now rewarding them with a % off by signing up. What this does is make it look like you are giving an additional perk instead of cutting all your costs.

In any environment, it’s a best practice to price based on your customers’ willingness to pay. To the extent possible, strive to understand if and how your customers’ willingness to pay has changed and also how able you are to meet those customers’ needs relative to your competition. Unless you have a sustainably lower cost business model, you’ll want to avoid competing on price as a price cut is very easy for a competitor to copy but leaving you both with lower margins in the process. The airline industry comes to mind.

Are you in a position of relative strength? If so, that might allow you to innovate, differentiate your offering, and improve your value proposition based on shifting customer needs, thereby taking market share without necessarily changing your price.

If you find that your customers’ willingness to pay doesn’t cover your costs, you’ll have to re-examine your business model.

Keep in mind that there would be different answers for a lot of different situations. First of all strategies may be different in B2B than in B2C. Within each type the following factors will play an important role:

1. Company strategic posture – what you want out of the situation: sail through? Take advantage? Weaken competitors? Portray as socially responsible? Etc.
2. Financial strength/leverage available.
3. Brand positioning
4. Relationships with customers
5. Distribution leverage
6. Product category in terms of price elasticity
7. Cost cutting advantages available.

You should consider the above and more factors before determining how to price during a slowdown.

The only thing I would add is to caution that:

1.Understanding price sensitivity in the current climate is critical – price decreases may not have the expected effect and that’s an expensive mistake.

2. Be aware of potential changes in your value proposition as the market changes. Your product may now be perceived in a different way and the value you deliver will still be the ultimate driver behind what you can charge.

3. Price is a key positioning statement, not just a piece of simple mathematics. Think long and hard about how a price change will be perceived by your customer and the long, as well as short term effects a price change may have.

In the end cutting the customer’s price just for the sake of cutting their costs isn’t the answer. Lower your costs first ….. ensure your product/service maintains “value” …. and focus more on customer loyalty/retention.

Copyright © 2009 Small Business Resource

What Are The Best Pricing Practices For Small Business During An Economic Slowdown?

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For example it has become very difficult to spend money on non-critical activities. It also means having to let go people (if you have employees). But it seems also that by doing so, we loose on competitiveness. It is a real catch 22. How do you adapt? What should small business owners do to keep their head above the water?

I think the details of how you adapt will vary by company and industry, but the fact is that small companies actually can adapt more quickly than big ones. One or two people can make a decision, and with electronic communications (email, website, twitter, or whatever) that change can be cheaply and quickly communicated.

The problem for many small companies is that they don’t have any emergency cash reserves (sometimes because the owner has just taken everything out over the years things went well) …. so they *THINK* they can’t adapt. But the problem is not size, the problem is available reserves.

I know of businesses who have started to bid on what was in the past not lucrative enough projects, just to keep their work force employed. Even though there will be no profit. One company started a new entity so that their “high end provider” image wouldn’t be tarnished by taking what the owner calls “el cheapo” jobs.

There are also companies who are offering certain vendors longer term commitments in the future against smaller payments now.

These sorts of decisions can’t be made quickly in large companies, but both of them were made AND implemented by small companies.

It’s also a great time to buy out competitors. Even those in good shape but where the owner might be older and ready to retire anyway.

There are lots of opportunities in this type of market where there is fear, and a partial but not complete loss of value, but not a real classic case of a bubble bursting with nothing inside.

From another angle …. The answer does not come from looking INSIDE your company, but rather from looking at your customer.

What changed, is their thinking. Before you can decide where to spend, or what to change, you have to find out how your customer’s thinking changed – how have their needs and wants changed?

Answer that, and you know how to adapt. All other changes that you make in your company come from that.

I also suggest that beyond this …. now is the time to market your company. I know this seems crazy, but beefing up your sales and marketing will help you make it through the tough times.

The thing to do with marketing is find your most profitable clients and market to them and similar prospects. Market only to them, not just “ok” clients and prospects. Marketing to marginal prospects will cost you too much money in hard times. The key is knowing your target audience extremely well and making them offers they can’t refuse. Think of what is in it for them, not what’s in it for you.

I know times are a little crazy, but keep servicing your customers and exceeding their expectations and you will be OK.

Copyright © 2009 Small Business Resource

Small Business: How Do You Adapt In Times Of Financial Crises?

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