If you slash spending and cut prices, prepare for three years of pain
One of the very few certainties in times of global economic downturn is the ensuing tidal wave of price-cutting.
Nervous marketers and execs assume that slashing prices and profit margins is the shortest route to customer and share retention in a recession. The latest research from Harvard Business Review, however, warns the ‘short-sighted’ response can have a long-term detrimental effect on a brand’s profitability and positioning.
In a study of 4,700 publicly traded businesses across three different global recessions, HBR found those that slashed spending and cut prices did not perform well in the long term. In fact, 17 per cent went under completely, while a further 80 per cent were still playing catch up three years later, long after the economy had recovered.
To avoid falling victim to an extended recession hangover – or join the 9 per cent of businesses that manage to grow in the face of it – HBR recommends the following:
- ‘Know your place in the market and exactly what drives your profits’: An intimate understanding of what aspects of your business (and your competitors’) drives the greatest profitability is essential.
- ‘Price through a segmented, value-based approach’: Not all customers have the same price sensitivity or derive the same value from your products – don’t treat them as such.
- ‘Patch the price leakage’: Be disciplined in resisting the ‘quick wins’ that can see you bleed profit long term.
- ‘Develop dynamic pricing where it makes sense’: Use data-driven marketing to micro-target your most valuable customers with offers that best answer their changing needs.
HBR’s study throws empirical weight behind rules any successful business owner or decision maker should be looking to live by, in good times, but especially in bad:
- Avoid knee-jerk reactions at all costs, even when under pressure – they rarely work out in the long term.
- Know what your customer needs and deliver value accordingly.
In times of recession or economic downturn, those that survive (or dare I say it, succeed) are those that double down on the golden rules, remaining steady in the face of uncertainty and delivering value based on their customer’s changing needs.
With that in mind, here’s four things more helpful and conducive to your success (than panicking or price-cutting) when economic uncertainty looms:
Re-examine your value proposition
The fact is, a recession will impact your customers in myriad ways, and where they look to cut back won’t always be obvious. For example, a lower price may not represent the best value exchange for them in the circumstances. Knowing where you stand in this ‘new’ market is essential.
Get your ‘data house’ in order
Fast access to reliable data is essential to ensuring you have the insights required to inform your value proposition and remain relevant in the face of changing customer need states. Profiling your customers – how, when, what, and why they buy – enables you to operate at your most efficient, with a laser focus on your most valuable consumers.
Lean on your agency
Leverage the experience and insights that an agency working across multiple categories can deliver in times of uncertainty.
And don’t forget the adage: “When times are good you should advertise. When times are bad you must advertise.”
The likelihood is that many of your competitors are spending less on media, so take advantage of the ‘buyers-market’ to leapfrog the competition.
Look for strategic partnership opportunities
Mutually beneficial relationships between brands can create win-win opportunities, opening new customer bases, accessing new insights, and even driving new product development or tangential streams of income. In a downturn, you can’t put a price on creativity and collaboration.