Pricing In A Downturn

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There are simply some things that all marketers must do during a downturn. In this section we’ll cover the essentials of how to think about pricing, discounting and coupon strategies on a downturn along with some essential discussion on budgets and marketing spending. We’ll review case examples of what leading marketers from all industries have done in recessions and learn from their results.

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Pricing In A Downturn

  1. 1. Pricing in a Downturn January 27th, 2009
  2. 2. Pricing decisions should be viewed not as Band-Aid solutions for bleeding income statements but as part of a long-term strategy for fiscal fitness. - Reed K. Holden, Harvard Business Review
  3. 3. Strategic pricing in downturn If your pricing strategy is more than a few months  old, it‟s already obsolete! Three primary driving of pricing decisions:   Willingnessto Spend: Consumers in all income brackets reevaluate their price sensitivity  Competitor’s Prices: Competitors will be tempted to wage price wars  Company Economics: Volatility will lead to cost uncertainty and cause marketers to second-guess their price and cost structures
  4. 4. Definition Price   The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
  5. 5. What is Price? Price and the Marketing Mix:   Only element to produce revenues  Most flexible element  Can be changed quickly Common Pricing Mistakes   Reducing prices too quickly to get sales  Pricing based on costs, not customer value
  6. 6. General Pricing Approaches Cost-Based Pricing: Cost-Plus Pricing   Adding a standard markup to cost  Ignores demand and competition  Popular pricing technique because: It simplifies the pricing process  Price competition may be minimized  It is perceived as more fair to both buyers and sellers 
  7. 7. General Pricing Approaches Cost-Based Pricing: Break-Even Analysis and Target  Profit Pricing  Break-even charts show total cost and total revenues at different levels of unit volume.  The intersection of the total revenue and total cost curves is the break-even point.  Companies wishing to make a profit must exceed the break-even unit volume.
  8. 8. General Pricing Approaches Value-Based Pricing:   Uses buyers‟ perceptions of value rather than seller‟s costs to set price.  Measuring perceived value can be difficult.  Consumer attitudes toward price and quality have shifted during the last decade.  Value pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricing 
  9. 9. General Pricing Approaches Competition-Based Pricing:   Alsocalled going-rate pricing  May price at the same level, above, or below the competition  Bidding for jobs is another variation of competition- based pricing Sealed bid pricing 
  10. 10. Remember the big picture Volume  Too many firms fail to account for the effects of price on volume and of volume  on costs. In a recession, trying to recover these costs through a price increase can be fatal. Impact on customer relationships  “Sucker pricing” is the term that Eric Mitchell, president of the Professional  Pricing Society (PPS), an Atlanta-based association of pricing and marketing managers, uses for the excessive pricing that occurs when companies have locked in customers through contracts or proprietary implementations. This creates ill will and tarnishes your brand. Impact on the industry  Price cuts not backed by cost reductions often lead to competitive counterattacks,  which erode profitability
  11. 11. Understand competitive advantage Pricing should be shaped by industry position and  long term strategy Price used as a weapon cuts both ways, don‟t hurt  yourself Not everyone can be the “low cost leader”  If price is “all your customers ask for”, find new  customers who value something else
  12. 12. Leverage price segmentation First class, business & economy = same  destination Accenture reports that a price Offer premiums for those willing to pay while  increase of just moving others „upmarket‟ 1% can improve operating profits Dynamic pricing based on (any factor you  by 11% if sales like!) time, location, quantity, derived benefits, volume remains constant. perceived value “The more you can slice and dice your prices and offerings without affecting your brand, the more you can sustain profitability.” - Eric Mitchell, Professional Pricing Society
  13. 13. Cost cutting can backfire In 2002, Kimberly-Clark reduced  the number of diapers in each package of Huggies in order to improve margins. Procter & Gamble could have followed suit, but instead they kept their pack size constant and added the word “Compare” to the label. At the same time, they increased discount coupons and store displays for Pampers, effectively spoiling the pricing power of Huggies.
  14. 14. Make products accessible with price During the Argentinean economic crisis  of 2002, Unilever made it possible for people to buy the Skip laundry brand by making small packages available, which carried a low unit price. They also introduced large economy sizes that offered people a better deal. Even if your brand is relatively high  priced, that high price, per se, need not be a problem as long as people believe your brand provides value for money. Most people find security in buying an established and reputable brand. What you need to do is make your brand accessible.
  15. 15. McKinsey & Company Tailored Pricing Approach
  16. 16. McKinsey & Company Game- Changing Pricing Strategies
  17. 17. Careful with those budget cuts Ogilvy & Mather Malaysia group managing director Zayn Khan says it is important  for companies to put in place a long-term plan covering three to five years, including strategies for recession and post-recession recovery. Most marketers make the mistake of taking a short-term view, which involves cutting  the marketing budget, because they consider the budget a cost that should be sacrificed to “protect” other costs. “Companies have to treat the marketing budget as an investment. It helps in building  brand equity and brand value in the long term,” Khan says. It is good to maintain the marketing budget when rivals are cutting their budgets as  it is a way to emerge from the recession strongly, gaining market share as well as improving profitability in the long run. Research has shown that a company that cuts its advertising expenditure by 50%  during a recession year would take two years to recover its market share, while a company that cuts its advertising budget completely in a recession would take four years to regain its market share.
  18. 18. Pricing in a Downturn Q&A Need help after the presentation? Email dana@marketingsavant.com

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