When business conditions are as tough as they are today, and sales flat or even declining, too many marketers often see a price decrease as an easy and reversible choice. However, what may look like a quick short-term strategic option can have devastating long-term consequences. A price cut may lower the perceived value of products and services, depreciate the brand or even trigger a price war.
Slashing prices isn't the same as having a marketing strategy! Cutting price is a bit like firing a nuclear weapon; once you push the button there is often no going back. Not everyone will agree with this, of course. For many companies, lowering their price is the only survival option when dealing with rising competition, shorter product life-cycles, declining product differentiation, smarter buyers, more private labels and an increasing value-for-money segment.
Companies might also consider a price cut if they are dealing with a rising currency in their home market that could make their products and services uncompetitive. We have seen this over the past couple of years in Switzerland, where the rise of the Swiss franc has made local companies and service providers some 20-25% more expensive than before relative to their European or American competitors.
However, it’s generally wiser to give more to the customer than to cheapen your value proposition since the purpose of price is to reflect the value of a product or a service. By slashing prices, marketers often nullify all the hard work that has been done in creating perceived value in the eyes of their customers.
Why are many marketers behaving in such a way? There are two main reasons. Firstly, pricing is a decision that can be taken relatively quickly. You can decide tomorrow to decrease your price by 20%, whereas it takes much longer to rethink your product or service, your communication or your distribution.
Secondly, price cuts look like a cheap option. If you take the “four Ps” of the marketing mix – the product, the place (distribution), the promotion (communication) and the price – then price is the only one that does not generate money.
As much as possible, therefore, cutting price should be your very last course of action. For a start, price cuts are almost always complex. How should a price be set? When should a company change its prices? Should it seek to follow or lead? And should it cut prices across the board, or only for certain products and segments?In mature markets, we know that today’s consumer typically wants either the best product or the cheapest one, so there is not much room in the middle for many products.
Price cuts are also hard to reverse, because very often, your competitors tend to lower their prices in response. Hence my analogy with nuclear weapons; once you cut your price, there’s often no going back.
So what can companies do instead of cutting their prices?There are several things, all of them connected with adding value to the consumer or the client.
The first thing is to rethink your value proposition by offering more for the same price. These can be things that cost relatively little but have a meaningful impact for the customer. Car companies can increase their warranties, chocolate manufacturers can sell packs of 25 instead of 20, or training companies can add a free session for a client. The key is to think in terms of value to the customer.
The second is to rethink your segmentation and brand portfolio so that you can appeal to more clients. Because as we all know, one product and one offer cannot please everybody. This is why a major tire manufacturer like Michelin uses various brands, from premium Goodrich tires for sports cars to retailer brands for price-sensitive consumers at Wal-Mart or Norauto. Similarly, Singapore Airlines has equity in three different brands (Singapore Airlines, Virgin Airlines and Tiger Airways) to address three different price segments.
Third, companies should reconsider their communications strategy to augment the offer and make the product or service better known to potential clients. Marketing and advertising spending often come under pressure during a downturn. But this is counter-intuitive, because it’s precisely when business conditions are difficult that you need fresher ideas. As advertising guru David Ogilvy once said:“When times are good, you advertise, and when times are tough, you must advertise.”Unfortunately, most companies do the reverse — when times are good they spend, and when times are tough they cut everything.
Fourth, and finally, use some good common sense and have another look at your costs. I’m not suggesting you should necessarily cut your costs by cutting people. I mean you should rethink your cost equation. This is an exercise companies do anyway, and it should be part of your daily best practice. But there may still be scope to go through your budget line by line with the goal of finding some extra fat to cut. Only after going through these four steps should companies reluctantly decide that they have no other choice but to cut their prices. But for me, this should be the very last option, because competing on price is always terribly risky!Dominique Turpin is the Nestlé Professor and President of IMD. He co-directs IMD’s Orchestrating Winning Performance program.
[This article has been reproduced with permission from IMD, a leading business school based in Switzerland. http://www.imd.org]