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Rethinking pricing in a recession

Recognise the tools retailers use to encourage you to spend.

Having recently skidded into a technical recession, the South African economy continues to experience low economic growth, which often mutes retail and consumer figures. 

As is the case in recessions, businesses are faced with a challenge to cut prices in a bid to keep customers, potentially harming their brands. Recessions often dampen consumer spending and their behavioural changes are passed on to suppliers in the business-to-business and business-to-consumer spaces, creating a ripple effect. “During recessions, customers become increasingly aware of prices and are more price sensitive. They are also more likely to increase savings while deferring non-essential purchases,” says Andrew Lane, director Monitor Deloitte South Africa.

Modern economists rely on two theories on recessions; one on the demand side that argues that a lack of demand can cause a recession and another which argues that oversupply is the root cause of recessions. Ultimately, however, consumer behavioural changes are evident which begs the question, how should one realign product pricing in an economic downturn?

Lower prices cautiously

Muted consumption often leads suppliers to panicked decisions around pricing in a bid to keep sales revenues afloat. Often, drastic price-cutting can hurt branding and because it’s a nippy prescription, an economic recovery would complicate any upward price revisions. “Lowering prices is not the only option that exists during recessions. This decision must be segment specific,” says Yasin Masha, senior manager, Monitor Deloitte South Africa. “One can lower some prices, defend prices for others, and even increase prices. The key is to know which segments to reduce prices for, in what manner, and by how much.”

Recessions occur when there is a misallocation of resources, not when there is a shortfall of demand and based on this premise, price revisions are a temporary fix.

Meanwhile, price adjustments often set the scene for a ripple effect in the market. “Companies fail to recognise how their pricing decisions shape competition responses,” says Masha. “In an example, a major consumer goods manufacturer in South Africa complained about how continued discounting by competition was hurting industry margins. However, the company neither recognised its role in the situation nor the opportunity to correct it.”

Embark on promotions

During recessions, special prices on selected products can protect your branding while making it clear that you are reaching out to customers in tough times. Despite lower profit margins, the retention of ‘top of mind awareness’ in a recession is a proven recipe for keeping any company afloat in a downturn.

In addition, special prices should be in line with selected product lines such as:

(i) Goods that buyers use to compare prices could create opportunities for price promotions.

(ii) Goods that drive traffic to the business. A common practice is discounting bulk products, which often drive foot traffic, such as diapers. 

Value management

Recognising changes in customer value requirements during recessions, some organisations detach non-essential features in a bid to lower their costs. This approach defends profitability by preserving volume margins. Similarly, others have fortified their profitability by actively promoting lower-priced offerings to price sensitive segments while improving price realisation from non-sensitive segments. “We see this in hotels and airlines mostly. There are also cases in pharmaceuticals. The hotels and airlines achieve this by defending their business traveller room rates/ticket prices while providing holiday packages through travel agencies at lower prices to more price sensitive segments,” says Masha.

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