When companies anticipate bumpy times ahead, executives return to the basics; they cut costs, trim inventories and review sales strategies. Unfortunately, this “back to basics” approach doesn’t always include a critical element…their pricing strategy.
Why is a review of pricing so critical when facing tough times? Consider this…
- Your price is the most visible part of your strategy
- Customers will be under financial pressure themselves
- Desperate competitors can be counted on to be more foolish than normal
- Any change in margin has an immediate and outsize impact on earnings
To form a pricing strategy that will let you prosper through tough times, you must:
Know where you are vulnerable to competitive pricing pressure, and Where you can raise your margin without hurting sales
To answer these two challenges, you must determine how price sensitive each item is to each customer. You can use your sales history of past customer item expenditures, purchase frequency and other factors to determine the price sensitivity of any sale. This same history can help you pinpoint where you’re vulnerable and where you may be under priced.
Consider these two challenges as opposite sides of a coin.
You should play defense where you’re vulnerable to competition. Identify prices where you are “hanging high” and prepare a defensive plan in advance. At the same time, you must have an offensive pricing strategy. If you only reduce prices, you’re guaranteed to lose.
An offensive pricing strategy is based on knowing where you can safely increase your margin. Even in tough economic conditions, many incidental sales are relatively price inelastic. This part of your strategy is essential; increasing prices where you can, gives you options. You can offset margin concessions on more competitive items, maintain infrastructure that competitors must cut and be ready to come back stronger than ever when economic conditions improve.
For additional information on Pricing Strategies for 2009 and beyond, click here.
