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W ith demand stagnant or dropping

W ith demand stagnant or dropping

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Published by samkad

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Published by: samkad on Jun 18, 2009
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W ith demand stagnant or dropping, most companies need to lower prices in a downturn. It’s easy tosee why. Price cuts are quicker and easier to implement than, say, introducing new products orimproving service. Customers often respond immediately to lower prices. A swift increase in sales canreinforce executives’ belief that they did the right thing.But the range of outcomes can vary widely in both the short and the long term. Customers develop acraving for big discounts and an aversion to full prices. Companies grow accustomed to the boost involume. That’s why promotional price cuts are sometimes called management heroin.Few companies can say, “We’ll lower prices today and raise them tomorrow”—at least not withoutrisking a consumer backlash.In our experience, companies that get pricing right manage it at three levels. They create a pricingstrategy that supports their broader objectives and positioning. They set prices on individual productsto reflect value to both buyer and seller. And they deploy disciplined tactics to manage the aspects of the transaction that most affect profitability.In downturns, pricing strategy must address differences between the right short-term answers and abusiness’ longterm health. Pricing of individual products needs to reflect changes in the wayscustomers make purchasing decisions.Tactics must be carefully designed to let companies execute quickly without losing control.In a normal business environment, the best course is almost always to first map out strategy, then setprices for products, and finally design tactics. But in a downturn, tactical decisions take on newurgency. So we’ll start there.Customer behaviour, markets, and competitors’ actions can all change quickly in a downturn. Butwhen firms accelerate tactical pricing moves without accurate information, they can lose control of theprices customers pay. The most effective companies quickly assess the impact of pricing moves bygathering lots of point-of-sale data, and maximize control by identifying and managing revenueleakage.Most firms rely on discounts and promotions to boost sales. But in a downturn, it becomes essential toquickly analyse which really works and which wastes money.Consider the speciality retailer in the US that found customers loved two-for-the-price-ofone offers yetwere less impressed by 50%-off sales.Meanwhile, maintaining control of pricing execution requires clear direction to front-line employeesabout what’s allowed and disciplined processes to find and remedy unauthorized behaviour.One way to ratchet up discipline is by tying both sales force and channel compensation to pricerealization.It’s hard maintaining margins in good times; in a slowdown no firm can afford uncontrolleddiscounting.Many companies lower prices too aggressively or broadly because they fail to determine why demandis falling and where it’s falling most.Spooked consumers won’t buy more until they feel that it is safe to do so, or until they decide thatprices have bottomed out. A company needs to know which of these factors is more important. If yourcustomers can afford to buy but are nervous, lowering prices may not be the right way to help themovercome inertia.Rather, firms can combine pricing with other marketing efforts to send the message that buying is alow-risk decision.Consider Hyundai Motor Co.’s programme in the US to allow customers who lost their jobs to return anew car. The strategy carries some risks, but it is not as risky as watching sales plummet. Hyundai’spassenger car sales rose 1.5% in the first four months of 2009, compared with the same period in2008. Overall, US car sales dropped nearly 36%. In fact, the Korean car maker was the only auto firmto see growth in US passenger car sales in January-April this year.Rather than relying on across-the-board discounting, sophisticated pricers find ways to lower averageprices in selective ways that consider pockets of real demand variance.

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