Navigating Downturns: Pricing Strategies That Work

Recessions and growth troughs are cyclical and cause significant fatigue among investors and policymakers. They also foster changes in consumer behaviour and spending. Indeed, consumers are more price-sensitive during downturns and are more likely to increase savings, defer certain classes of spending, and adopt lower-price offering product configurations. In such a scenario, effective pricing strategies can help businesses navigate the downturn to drive growth and uplift profits.

What is the Right Pricing Strategy Amid a Downturn?

Pricing is one of the most powerful levers businesses can use to optimise their profitability and competitiveness during a downturn. However, pricing decisions are often complex, and influenced by multiple factors such as customer preferences, market conditions, competitor actions, and cost structures.

In a downturn, these factors become even more dynamic and uncertain, requiring businesses to adopt a more agile and proactive approach to pricing. To ensure long-term fiscal fitness, the authors of the acclaimed book, The Strategy and Tactics of Pricing, recommend that businesses should keep the following three key principles in mind to help them implement the correct pricing strategy amid a downturn:

Value-based

Customers’ value requirements often change during economic downturns. Therefore, businesses should be attuned to shifts in creating and capturing value for their customers rather than competing on price alone. They should understand the needs and preferences of different customer segments, and offer solutions that deliver superior value in quality, functionality, convenience, or experience. Value-based pricing involves effectively identifying and communicating shifts in business value proposition to customers as well as allied shifts in the product or service that can help them achieve their goals or solve their problems.

Proactive

Businesses should anticipate and respond to changing market conditions and customer behaviours rather than reacting to them. This means monitoring the external environment closely and identifying opportunities and threats that may affect the demand and profitability of their offerings. Proactive pricing also involves testing and experimenting with different pricing tactics and strategies, such as discounts, bundles, loyalty programs, subscriptions, or dynamic pricing, to optimise the revenue and margin potential of each customer segment. During the 2008 banking crisis, which led to a global recession, the board of Big Bazaar India adopted different strategies and altered its current competitive strategy in a proactive manner. They implemented a behavioural strategy, a social strategy, a reproductive strategy, and a mix of evolutionary and reproductive strategies. For example, to increase the effectiveness and efficiency of stores, the firm set up various training, cross-training, and other vocational learning initiatives for their deputy store managers, store managers, and other key staff of the stores. As a result, they were able to increase productivity and reduce redundancies. Furthermore, they revamped their business model by discontinuing and pausing certain items that were either non-profitable or low in demand. As a result, the firm could focus on profitable products, hence, increasing revenue generation.

These proactive strategies helped Big Bazaar navigate the recession. The firm did not report any losses in the quarter following the end of the recession and was successful in maintaining its projected usual financial standing with minimal variations.

Profit-driven

Businesses should align their pricing decisions with their overall business objectives and financial goals rather than following industry norms or benchmarks. They should analyse each product or service's cost structure and profitability and set prices that reflect the value delivered to customers and the costs incurred by the business. Profit-driven pricing also involves measuring and tracking the impact of pricing actions on key performance indicators such as sales volume, revenue, margin, market share, customer satisfaction, and loyalty.

Such a strategy implies that a company’s success at managing prices is relative to alternative investments rather than by the revenue it generates relative to its competitors. For example, during the 2008 recession, Alan Mulally, the then newly appointed CEO of Ford Motor Company, ruthlessly cut production costs and diversified the business to achieve profitability ‘before the credit markets froze up in 2008’. Although this strategy cost the company its dominant market share, the auto major saved itself from bankruptcy.

How Can a Business Design a Holistic and Effective Marketing Strategy?

For effective pricing during a recession, Manish Gangwar, Associate Professor, Marketing, Indian School of Business (ISB), advises decision-makers to approach the solution holistically. Since pricing cannot be viewed in isolation, he recommends the following strategies to enable companies to survive amid new competitive pressures that a downturn presents:

Be Creative

Businesses should look for ways to create new sources of value for their customers by innovating their products or services. For example, they can introduce new features or benefits that address their customers' pain points or aspirations in a recession. They can also leverage digital technologies or platforms to enhance the customer experience or convenience.  

Marketers should devise creative ways to work around a tight marketing budget in a downturn. 

In most instances, they must break from conventional wisdom to convey their differential value to customers. 

A prime example of this is how dairy brand Amul doubled its advertising expenses during the COVID-19 downturn. Demand for Amul's liquid bottled milk climbed by 5-7% since the pre-COVID period. Furthermore, despite the closure of restaurants and hotels, interest in its paneer and cheese products rose by a minimum of 30%. Sales of Amul ghee and butter climbed by 10% to 20%.

Train your team

Businesses should train their sales and marketing teams to communicate their value proposition to customers effectively. They should also equip them with tools and techniques to analyse customer data and feedback, identify customer segments and needs, tailor their offerings accordingly, and negotiate prices confidently.

Most managers do not receive practical training in how they should create innovative pricing models in a downturn. According to Professor Gangwar, the marketing and sales teams should be trained and upskilled in value-based pricing or negotiation techniques. For example, sales representatives should be empowered with knowledge of pre-approved discount policies to help them negotiate a mutually beneficial trade-off with buyers.

When sales representatives and field managers are trained on these skills, they will proactively design more thoughtful pricing strategies in anticipation of recession-induced changes. Recessions are also an appropriate time for upskilling sales teams as it will be a lean period for them.

Reinvent and Refresh

Businesses should regularly review their existing product portfolio and pricing strategy and make necessary changes or improvements based on changing customer preferences or market conditions. They should also experiment with different pricing models or tactics to attract new customers or retain existing ones.

Companies should take advantage of a downturn to reinvent, refresh and infuse new vitality into the system, says Professor  Gangwar. He urges companies to seize new opportunities in a downturn.

Seizing an opportunity in adversity, the Noida-based Hula Global pivoted from manufacturing garments to producing PPE kits during COVID-19. They started to manufacture N95 masks, surgical gowns, face shields, and other essential items during the COVID-19 lockdown period.

Steer Clear of Quick-fix Pricing Solutions

While it may be tempting for businesses to resort to quick-fix pricing solutions such as across-the-board price cuts, they should steer clear of such solutions as they can have long-term negative consequences for their brand image, customer loyalty, and profitability.

Quick-fix pricing solutions are often based on short-term considerations and do not consider the business's value proposition, competitive positioning, cost structure, and strategic objectives. They can also create a downward spiral of price wars, eroding the margins and market share of the entire industry. Moreover, they can damage the perceived quality and value of the product or service, making it harder to restore prices to pre-recession levels when the economy recovers.

The financial market crash of 2008 saw leading market players respond in agile and creative ways to retain their competitive edge. For instance, retailer giant Wal-Mart slashed the price of 100 popular toys to less than USD 10 during the peak holiday season in 2008. Its aggressive pricing strategy triggered a price war that led Target to announce its own price cuts.

Instead of quick-fix pricing solutions, businesses should adopt a more strategic and disciplined approach to pricing that is based on the principles of value-based, proactive-based, and profit-driven pricing discussed earlier.

Professor Gangwar offers a unique take on this issue, “Instead of lowering the price, the sales and marketing teams should work with clients to identify non-pricing factors that will help them retain customers,” he says. “Firms that have a corpus of money in a downturn can offer an extended credit period to consumers as this will allow more time for them to increase their cash flow. Companies can also relax the delivery schedules for customers or offer them smaller purchase quantities. Such measures are more valuable for the customers”.

Professor Gangwar insists that companies exhaust all non-pricing opportunities before implementing heavy price discounts. “The challenge is when the recession is over, companies that have opted for hasty discounting would have anchored customers to the lower prices and may, therefore, find it difficult to recover in the long run”. In other words, he underscores the importance of maintaining price integrity in a down market. “Companies should think through what else they can do to retain their customers when compared to their competitors”.

He warns marketers from exploiting the consumers’ vulnerable situation during a downturn. However, he adds, “In situations where companies are compelled to offer discounts, they should restrict it for a limited period, say, for three months, and communicate to consumers that the prices will automatically go back to normal once the markets recover”. He continues, “Don't lock yourself into long-term contracts during the recession only because you are under pressure. If you reduce the price, that becomes the new norm, and then the prices may be lower forever. So, when things go back to normal, you will struggle to increase the price”.

Ad hoc discounting may adversely impact a company’s reputation for price integrity.

In addition to protecting the brand, marketers should also safeguard customers’ psychological well-being in a downturn, according to Harvard Business School professor Nancy F. Koehn. For example, cosmetics sales often increase during a recession as they uplift one’s mood. The lipstick effect (or Lipstick Index) is when consumers spend on affordable luxury products even amid a recession. History and research are testaments to the spike in sales of lipsticks when the economy heads into a recession. The Great Depression saw cosmetics sales rise in the four years from 1929-1933. Lipstick sales also increased during the 2001 recession when women turned to affordable beauty products to ‘treat’ themselves to small indulgences.

Seize New Opportunities in a Downturn

When the economic landscape shifts during a downturn, it pays to have a proactive pricing strategy based on the altered behaviour of consumers. A thoughtful strategy that analyses consumers’ purchasing motivations would enable a swifter recovery for products. With both the short and long-term in view, a business’ pricing plan should optimise the trade-off between prices and benefits while aligning with how buyers experience the value of a particular product or service when the economy bounces back.

A McKinsey study revealed that in a recession, consumers perceive more value in lower-priced products than in premium-brand products, even if they can afford the latter. For example, in the 2008 recession, FMCG major P&G saw an opportunity for a new product. In response to the needs of thrifty customers, the company launched Tide Basic, a cheaper version of Tide, its premium category laundry detergent, after its sales took a hit.

The company’s cheaper brands (such as Luvs diapers and Gain detergent) gained rapid market share over the more expensive products (such as Pampers and Tide), even in the absence of advertising. P&G also viewed the economic downturn as an opportune time to aggressively target low-income consumers whose numbers surged during this period.

The same McKinsey research found similar trends in other industries. For example, most consumers surveyed were more inclined to switch to cheaper electronic products than purchase the more expensive ones that boasted superior features. Most of these consumers said the more affordable products performed much better than expected.

In Summary

Today's world is grappling with myriad macroeconomic variables, such as the Russia-Ukraine war, broken supply chain, rising fuel prices, and inflation. Businesses are already factoring in an economic downturn by the end of 2023 or the beginning of 2024.

Amid a downturn, a business' pricing strategy must show agility and innovation—without losing sight of value and profitability. Avoiding costly pricing mistakes during a downturn with the help of a data-driven pricing strategy would enable improved decision-making across departments—finance, marketing, operations, and product development.

Implementing an effective pricing strategy amid a slowdown should also factor in how to defend the company’s prices when normalcy resumes. Businesses that can adapt and respond to the challenges and opportunities of a downturn with effective pricing strategies will be better positioned to survive and thrive in the long run.