Lowering prices: How far is too far?

Jason Bholanauth

Jason Bholanauth

Founder of Inbound Mauritius // Blending data with marketing

With the direct hit from COVID-19 resulting economic crisis, local brands have started to adapt their marketing strategies and pricing. This results mostly from a need to generate demand and cater for changing customer behaviours. 

In fact, customer spending dropped since Mauritius was hit by the pandemic, causing customers to redefine their priorities and hence think twice before buying. For example, sales for sanitary products increased while hotel booking drastically decreased. 

The complete lockdown didn’t help much while salary cuts, new amendments to local regulations, and other macro / micro changes will certainly worsen consumption levels.

According to the State of Digital Marketing (Mauritius) 2020-21, 46% of surveyed marketers mentioned that market price is influencing clients’ decision to purchase while 76% agreed that acquiring new clients is the top challenge in a post-COVID-19 era. 

In fact, COVID-19 and it’s associated economic crisis clearly showed how customers’ disposable income fluctuates resulting in liquidity constraints. This basically means your customers will cut down on certain spending which are not necessary.

In such uncertain times, for brands, it is very tempting to lower prices, provide discounts, and other incentives to increase demand. Is it the right thing to do?

What happens when you lower prices for too long?

There are different reasons to lower prices. Demand elasticity being the main one, brands tend to monitor macro and micro economic conditions influencing customers’ buying decision making to decide on pricing. Factors such as a change in priorities pushed the most affected industries to review the go-to-market approach.

Quality

Some organisations will decide to run at a loss by lowering their prices so that they remain competitive in the market. While on the short term, this can ensure an income, provided demand is high, on the long run, it creates a perception of low value products.

Some brands might be tempted to lower production cost (hence lowering fixed cost), to breakeven at an earlier stage and start making profit faster. For instance, instead of choosing quality raw materials, brands could go for cheaper ones consequently lowering the product quality. 

 

Branding

Closely related to the above, an organisation’s brand can be impacted by staying in the lower band. For instance, 5 stars hotels in Mauritius opening at one-quarter of the normal price may create a disconnect to their usual service standards. The perception of value is what marketers need to think of while decreasing prices. Value in itself is quite subjective and customers will benchmark cost to benefits before making a decision in tough times.

A change in the price can also impact on the brand positioning in the market. For example, imagine if Apple, who built its positioning in “expensive-phone” market move to the lower band and start providing cheaper phones. This move could hinder its perceived value as well as credibility towards its existing customers.

 

Increase in sales volume yet…

Assuming your product or service has a good demand, lowering your prices will increase your sales volume, provided quality remains constant. However, this is not always the case. During crisis, you may either:

    1. Keep same price with higher quality: This usually helps a brand to extend the product line and increase the prices after an economic downturn; or
    2. Lowering price with same quality: In the short term, this could help the brand sustain itself and gain market price during a crisis. However, it might be difficult to increase pricing after a recession.

From the graph above, you can see to generate profit, your sales revenue must exceed your fixed and variable costs. As such, brands tend to increase their volume to breakeven at an earlier stage (NEW BREAKEVEN). 

Below, is a more explicit graph: 

Change in buying behaviour

Very often marketers tend to overlook the long-term effects of lowering prices. In fact, for consumables or tangibles, customers may be conditioned to purchase only when prices are discounted. They will also be tempted to buy in bulk at a cheaper price. As a way, it creates a psychological effect where the customers put more focus on price instead of quality and product differentiators.

Margin of profit decreases on the long run

Right now, businesses who have lowered their prices are experiencing high sales volume or for some they are able to sustain operations. However, the margin of profit remains low and going beyond the crisis, these businesses will find it difficult to up prices as a way to increase margin of profit.


Your war room during a recession

Marketing shouldn’t stop during recessions and above all pricing should adapt to enable growth and retention. To help you, here are a few strategies to consider having in your war room. Some of which may not even be financial ones;

  • COVID-19 Insight Engine provides key figures on different areas affecting the business directly and indirectly. This paints a picture of the impact of COVID-19 on the supply-demand, how policy makers are tackling the pandemic, among others.

     

  • Find the recurrent customers and upsell
    You read it several times, acquiring new customers costs more than retaining existing ones. This is even more true today when potential customers are reluctant to purchase. Recurrent buyers tend to be more profitable and can be sustained with high value, lower price and special discounts.

    Upselling also requires that employees are trained to ensure a smooth customer service. For instance, employees at every touchpoint shouldn’t be working in silos as it slows down conversion. 

  • Diversify your products and services

Product and services differentiation is another approach to have in your war room. Perhaps, organisations may be tempted to cut cost on product innovation. However, as competitors are busy cutting costs, acquiring raw materials is cheap hence it is easier to come up with new products. 

During and after the 2008 recession, several companies were founded with technology as backbone and a monetization architecture that spur growth. These companies included WhatsApp, Instagram, Uber, Pinterest and Slack. 

  • Review your pricing strategy
    While there exists different pricing strategies, during a recession, you would want to retain, upsell, and acquire new customers. The whole point is to ensure productivity and sustain your operations. As I mentioned earlier, decreasing prices can be tricky. So, what are the alternatives?

     

    • Pricing Ladder where you give your customers the opportunity to choose how much they want to pay. This could be in the form of different packages with specific features;
    • Subscription based pricing with different schedule and frequencies. For eg: MyTeaBox;
    • Value based pricing by calculating how much a customer costs you. Here you may require a properly defined buying funnel including the resources at different steps. 
    • Dynamic pricing which takes into account both the market and your customer demand level. This is mostly used in the hospitality and travel industry. Using an algorithm, brands can fluctuate their prices based on the customer ability to pay. 
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