I have always loved the TV show “The Price Is Right.” More than just the fun of the show was the imperative task of finding the right price for everyday items like refrigerators and stools. I always wondered how people could figure out the real price of things – “people” including me.
But guessing prices on TV is not the same as actually bargaining at the counter. In real life, shoppers are not so easily fooled. In fact, these days, they are paying extra attention to prices, and know exactly how much they are paying for that bottle of shampoo or that packet of cheese.
For big-ticket purchases like TVs and car insurance, they are helped by a plethora of comparison tools on the Internet and by a worldwide social network that provides information on how to get the best deals. And now with apps like ShopSavvy on the latest mobile phones, shoppers can make instant price comparisons simply by taking a picture of the product code.
But does such clarity of pricing, at the click of a finger, mean shoppers won't be willing to pay full price?
Not necessarily. Pricing doesn’t have to decrease during a recession. While sales and discounts may seem like a must during this time, retailers have more room to maintain prices than they think.
For example, there is often a loyal customer base that does not want or need to be persuaded to buy by discounts. And although there is no end to complaints, customers can be surprisingly tolerant of general price increases that they understand are directly related to increases in the cost of inputs such as jet fuel or milk for ice cream.
In addition to the obvious profit loss caused by hasty price cuts, there is also the dangerous fact that discounts and promotions condition buyers to expect even lower prices. This customer mindset makes it more difficult to raise prices again.
Furthermore, in what Accenture calls the “discount trap,” price cuts require a price increase to bring the price back to nominal—indeed, a price cut of 30% requires a price increase of 43%. So customers are likely to accept larger future price adjustments than the price cuts.
Before cutting prices, companies should consider several factors to determine whether they can maintain their current prices. First, consider whether customers still need their product. Are there many substitutes on the market, and if so, how attractive are those products to customers?
While demand may be low, customers who still buy may be loyal to a product category and willing to pay more for the product they need. What risks can your customers reduce by buying from you instead of your competitors? Does your company have a unique position based on its ability to deliver products or services on time?
All of the above points point to the ability to quickly and clearly segment customers according to their price sensitivity, and assess the likely effect that price reductions will have on their current and future purchases. Having good pricing capabilities will be very effective.
But then you evaluate your customer base and market share goals and you realize that you still have to lower your price. There are many ways to minimize the overall impact on your average price.
Here is a list of the first things I suggest:
* Be mindful of your customers’ pay cycles. The Wall Street Journal recently reported on how companies have had success cutting prices close to customers’ paydays. Purchasing power is relative and can vary greatly from week to week and even day to day.
* Create the impression of a discount by adding a “free” amount. It’s an old trick but still effective: giving customers “an extra 20%” of a product may not cost as much as a 20% discount while the value to the customer appears to be the same.
* Discounts on a customer-to-customer basis. Bargaining back. And it happens everywhere. Today, customers are willing to ask for discounts even at grocery stores. Companies need to let their sales people know how slow they are in negotiating and train them to ensure they get the best deal.
* Traditional financing. Payment deferral programs are making a big comeback, with retailers like Kmart offering one example. And a new company, eLayaway, has updated the concept, allowing customers to choose from 1,000 online retailers. The site offers monthly credit to customers’ bank accounts in exchange for a $1.91T service fee.
So what have you seen? Where is pricing power increasing and why? Where is discounting needed and what does it do for industries? Are any discounts too much?
Tuan Vietnam
