With some major economies decelerating - or in outright recession - many younger managers are getting their first experience of cyclical business pain. What do these callow youths need to know to adjust to a harsher economic climate?

For the first in a series of occasional posts on this issue, I spoke to Tony Cram of Britain’s Ashridge Business School about one of the most important things to get right when economic confidence is evaporating: pricing. He says that managers should do three things when they set prices during a slowdown or a recession.  

1. Understand how price-sensitive customers will behave - and act on that knowledge more quickly than competitors

“What you have in a recession is an opportunity to learn faster about changing customers than your competitors and use that insight to gain advantage,” says Mr Cram. He advocates researching the likely behaviour of the most price-sensitive customers first and then coming up with a hypothesis for the likely behaviour of the broader customer base. Knowing where they are likely to economise will give clues as to whether prices are sustainable or need to be cut. He also recommends that managers pay close attention to the performance of their customers’ customers’ customers to identify potential problems long before they ripple through.

2. Consider the longer-term strategy before changing prices

“The great danger is you take sensible short-term decisions that screw up your long term brand value,” says Mr Cram. A panic discount might destroy a product’s hopes of earning a premium price in the future. A smarter strategy might be to reduce prices on big packs and hold the line on smaller packs. A three-for-two offer might also be preferable since it maintains the notional unit price. In the business-to-business arena, price-sensitive customers might be offered a cheaper deal - but only if they forgo frills they would have been offered previously, such as free product support or flexible delivery times.

 3. Be sympathetic to cash-strapped customers - and take care not to start a destructive price war by accident

Any price cuts must not appear to be a panicked reaction to falling sales - far better to suggest that they are a recognition that customers are themselves under pressure. Mr Cram says price changes will inevitably be scrutinised closely by rivals. Without advocating any collusion with competitors, he suggests that managers should take care not to look as if they are starting a price war (unless that is what they are trying to do, of course). Promising to match a rival’s prices is one way of being competitive without risking a price war. Likewise, if a competitor slashes prices by a ruinous amount, managers should investigate very thoroughly before launching retaliatory action. The rival’s aggressive move might just be ”the idiot decision of one manager who is going to get fired”, he says.

May 15th, 2008 in Managing in hard times | Permalink