Pricing Goods and Services in a Recession

Be strategic about price cuts and other discounts.

by Heather King

This recession has been good to buyers. For those with money to spend and the desire to part with it, deals abound- — nearly everything can be found for a steal. But is offering deep discount pricing really the best way for Utah business owners to survive the lean times?

Pricing expert Matt Johnson, managing partner at the San Francisco office of global marketing and strategy consultants Simon-Kucher & Partners, cautions, “The easiest thing to do is to go to the price lever as a way to regain or sustain market share and maintain revenues, but the danger is that you may retain your total revenue level for the short term, but you damage the price level for your products so badly that when the recession bottoms out and you begin to recover, you’ve basically reset the market at a level that is dramatically lower and damaged the value of your company because it’s very difficult to move prices back up once you’ve reset them.”

While discounting goods and services does make sense in a number of instances, it’s a decision that should be made only after fully evaluating a company’s overall business position. Ken Kaufman, founder and CEO of Pleasant Grove’s CFOwise, which offers part-time chief financial officer services to start-up, emerging and medium-sized businesses, explains, “If a company is going to change their pricing, they have to recognize that it is a business model change and they have to go through and figure out what the impacts are going to be from a profitability standpoint, a cash flow standpoint and then from a competitive standpoint.”

So what is a business to do to retain current customers, attract new clients and maintain market share in this economy?

Watch the competition closely

Not only is it important to know what your competitors are doing, it’s critical to understand why they are doing it. Has the competition been able to realize tangible cost savings through a better, more efficient business model and therefore lower their prices while maintaining profits? If so, explains Kaufman, “We need to be doing something better and adding more value. We’ve got to position ourselves so that we can garner a premium price.”

On the other hand, “Many times there are companies who are near death and those companies don’t act rationally,” says Johnson. “Companies are hurting for cash flow and not able to get credit so they have to sell at any price in order to stay afloat. If you are a company that doesn’t need to do that, you have to make a very hard choice to maintain your strategy or follow the competition and try and hold market share. That’s why CEOs are going to have to earn their money making some of those hard calls.”

Mark Carr and Dennis Devine, co-owners of Compax, a manufacturer and distributor of bottles, tubes and packaging components for the personal care industry, made a conscious decision to draw the line on how far they would cut prices. “I went in at 10 percent margin on a quote and I was not one of the top five bidders. [The others] are giving it away, coming in at cost and hoping that as the market changes and improves that they can then bump that pricing up and lock it in,” says Carr. “I don’t think it’s a smart model to give it away because, long term, it’s just not the answer. There is business out there; you just have to work harder to find it.”

Tactics to survive and thrive

It seems clear that there will be fewer competitors in the marketplace when we emerge from the recession, but those that do survive will become the market leaders. Until then, companies are wise to consider all of their options before making
rash decisions.

“Our strategy is that we are working with some different brokers of resin other than the traditional Exxon and Mobil,” explains Carr. These brokers are offering discounts on raw product, but only if Compax buys it at five times the amount they might normally. It’s a risk, but Carr believes it will pay dividends. “If I am experiencing a 5-cent per pound savings on resin and I’ve got the customers that are using the volume up in 90 to 120 days, then it’s worth the cost.”

Johnson suggests that companies with multiple product lines or levels of the same product make strategic decisions about pricing. “They need to be very specific about which products — particularly end-of-life products or products that were already pretty commoditized — they use to compete on price and hold the line on their more premium products and new releases.” He also suggests that companies may choose to delay new product releases and delay the end of life of some old products.

This strategy will also help those companies raise prices as the economy improves by offering product upgrades and added value. “If I was in technology, we would want to be looking at product upgrades to be able to continue to raise prices,” explains Kaufman. “Everything has to be couched in the context of doing more to meet the needs of your customers. What extra value am I bringing to the table and how much is that worth?”

An entrée for entrepreneurs

“What I see every day is that there are more entrepreneurs that are being more successful than they’ve ever been and growing faster than they’ve ever grown,” says Kaufman. Starting a business in the current economic climate may seem challenging, but it offers opportunities as well. For one, many potential competitors have gone out of business and customers are looking for new choices.

The best advice for starting a new venture is to do copious amounts of research. Kaufman suggests, “Do a complete competitive analysis showing the range of price and quality of all competitors on a grid. Then look at what you’re doing and how their products and services compare. Look at the grid and see where you can fix on a competitive pricing standpoint relative to the value you are going to bring to the customer. Value-price around the things that you are doing that no one else is.”

Banish the bad news

Carr doesn’t subscribe to the doom-and-gloom philosophy. “What pricing in a recession means is we have to be as efficient as we’ve ever been, we have to be as hard working and as on top of our game as we’ve ever been. If you are the very best at what you do, you’ll be fine.” He recommends cutting back on frivolous expenses, taking care of the expenses that get you business and further the sale, and getting as efficient as you can so that you can offer the best price and quality.

Pricing Tactics

Cutting prices on products and services is often one of the first strategies businesses consider when sales are down and cash flow is waning because it offers an “immediate fix” to the problem. But a company should fully evaluate its business position and other options before deciding to discount its most valuable commodities. Some options to consider:

1. Delay new products and upgrades until the market improves.


2. Position current products and services to garner a premium price.


3. Right-size inventory levels to meet current demand, then forecast and plan for a realistic market size.


4. Offer junior-level or less experienced professionals for the project (who are already paid less than experts in their fields).

If, after examining profitability, cash flow and competition, you do decide to cut prices, follow these guidelines:

• Discount only products that will reach their end-of-life cycle in the near future or that offer the fewest features (low-end models).


• Tie pricing concessions to advantageous contract terms for your company, such as 30- or 60-day payment in full.


• Collect a retainer for services at the time of agreement and then credit it to the last payment.