Small business marketing : pricing strategies for hard times

Your business is struggling because of the economic downturn. You call a meeting with your senior managers and ask for suggestions and someone says "let's raise our prices". The room falls silent. Money is that money is tight, consumers and businesses are cutting back and this guy wants raise prices. Suicidal, right?

Well not necessarily. In fact if you stop and think about the recession we're going through (or are just coming out, if you prefer), prices are not a central issue. The factors constraining demand today are unemployment, lack of credit and a fragile confidence. Lower prices do not really speak to these concerns so rather than cutting prices it's better to concentrate on tactics that do, such as offering credit deals or guarantees that boost confidence.

Don't panic into making wholesale price cuts because they can:

Cheapen the brand

Offering lower prices might seem like a positive message to customers but of course indiscriminate discounting can suggest desperation and worse permanently damage the brand by association with "cheapness".

Lower sales volumes

The rationale for cutting prices is usually to "get customers through the door" or "keep the order book ticking over" but sometimes customers will put off purchases in anticipation of further cuts. Also, more often that not, the effect will be to bring forward sales from the next period and leave your business with lower volumes and a bigger headache then.

Hit the bottom line

Price cuts can be very damaging if done without attention to margins. Profitless sales do nothing to protect the bottom line and if prices are reduced without related cost cuts and volumes don't increase because more customers are not lured in by the new prices, then the business will be worse off.

When can price increases be a good idea?

• Look at your range of products and services and think which are the stronger items, maybe regular sellers or your specialities that do well come rain or shine. A modest price increase on the items that are still doing well might help contribute enough profit to make up for the fall in demand elsewhere.

• It is a common feature of almost all societies that the stronger and richer sections of the population find a way to look after themselves whatever the economic circumstances. A valid recession strategy could be to shrink the business and focus on the higher end customers where margins are wider. In conjunction with investment in the brand and service or product improvements, this could justify higher prices.

• Repackaging your product or service in different ways could be a cover for selective price increases. This can work both ways: unbundling different elements of an offering previously only sold as a package and charging more for the component parts OR packaging various items together which are sold at a premium (e.g. additional warranty or after sales service with a product or supplying a credit deal with a product or service).

Alternative thinking

Rather than just thinking in terms of price increases or decreases, there are some other possible approaches:

Segmentation

Are you in a position to replicate the model that works so well for airlines, offering First Class, Club and Economy (Coach) versions of your product at very different prices? Strategising along these lines forces you to think about who your different markets are and what they want from you and could perhaps lead to a remodelling of your entire business and not just the prices.

Simplification

Making your prices more open or simple to understand may have a greater effect than merely reducing them. If there is a service or product where the price is not widely known then customers are likely to fear the worst i.e. in their ignorance, assume it is more expensive than it is and put off looking for a quote. Or perhaps you have a product or service where prices are rarely fixed or openly advertised as is the case with many professional services. Or again are you in a field where "haggling" is the norm or one notorious for starting with a basic price and then ending up with a much higher one after various "extras" are added in. All these situations give you an opportunity to gain a competitive advantage by dealing with the customers' fears by offering simple, fixed or open pricing without necessarily lowering prices. Of course the strategy can also work in reverse where you take an already simple pricing structure and complicate it to your advantage while taking care not to alienate customers or damage your reputation.

Conclusion

every business in every sector in every area will have to think through a strategy that is right for them and much of the material here will not apply, but hopefully this article will stimulate a bit of original thinking beyond boundaries of conventional recessionary wisdom.

For more small business marketing ideas please see a sister article on the author's website: "30+ marketing ideas for small businesses"