Communicating the right pricing message

Faced with dramatically falling consumer demand and subsequent downward pricing pressures, some companies — such as inventory-heavy apparels — feel the necessity to lower or even slash retail prices.

But what sort of message does this send to customers? Are you telling them your products really aren’t worth the prices you’ve been charging? Are you communicating mixed messages that will haunt you when the recovery finally begins?

“Discounting and promotions condition the buyer to expect lower prices” and create a customer mindset that makes it “hard to raise prices later when times are better,” according to Paul Nunes, executive director of research at Accenture's Institute for High Performance

Writing in the Harvard Business Review [2-23-09], Nunes calls this the “discount trap,” and says that it exacerbates the difficulties faced when you want to raise prices. Nunes calculates that a 30% price cut today requires a 43% price increase tomorrow to regain price parity.

Therefore, the Accenture director suggests several alternatives that communicate value more effectively.

• Analyze whether your product has comparable competitors that are strong enough to overcome the brand loyalty you’ve established. Price may not be the deciding factor in your customers’ buying decision processes.
  
• Frito-Lay is trying promotions that are “different at the beginning of the month than at the end of the month," CFO Richard Goodman told The Wall Street Journal. "People have more money to spend at the beginning [of the month] and a little less at the end," he said. It is called 'Paycheck cycle' pricing.
  
• “Discount” by increasing the amount of product you sell for the same price. Nunes notes that "20% more product may cost a lot less than offering them a 20 percent discount” and appeals to consumers’ sense of value.
  
• Haggling is back,” Nunes says. “And it's everywhere. Customers are now prepared to ask for discounts even in grocery stores. Let sales people know how much leeway they have in negotiating prices and “train them to ensure they consistently realize the best negotiated price.”
  
• Create deferred payment plans for higher priced items, formerly known as the “lay-away plan.”
  

So, what’s old is new again, and the mantra “Never pay retail” rings loud and clear.

Read Paul Nunes entire article at the Harvard Business Review.