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Why Price Cuts Aren’t an Answer During Recessions

A recession will come eventually, but slashing prices on your products isn’t necessarily the best way to deal with it. Read our article for alternative strategies.

No, the U.S. is not currently in a recession. In fact, it’s still in a historically long expansion. But because recession and expansion are cyclical, the currently robust economy simply means that recession is coming at some point.

Smart companies often plan a recession strategy before demand and sales start going slack in an economic downturn – or plummeting. So it’s equally intelligent to think through the potential impact of your plan. Far too many recession strategies end up hurting companies once the economy starts pulling out of the trough again.

Price Cuts Can Erode Profits, with Potential Long-Term Effects

Cutting prices is a time-tested method of dealing with recessions. Customers tighten their belts in a recession and may decide not to purchase for longer periods, look for cheaper products, or even change their purchasing strategy for the long term. Price cutting may keep customers who are looking for less expensive products and maintain the loyalty of those who may otherwise put off purchases.

But decreasing prices as a business strategy can backfire, too, by eroding profitability. If your profits drop, it can affect not only your bottom line but, ultimately, your position in the field. Will lagging profits affect your R&D budget, for instance? If your company relies on innovation, does the impact on R&D run the risk of making you fall behind competitors in terms of business leadership?

Price cuts can damage your company’s profitability going forward.

Other Recession Strategies

A recent Harvard Business Review piece points out that companies simply need to think more strategically about what their strategy should be if we come to the next downturn. Here are the authors’ suggestions:

1. Analyze pricing to see if segmentation based on value is feasible

The HBR primarily suggests a fine-grained analysis of your company’s pricing strategy. If your market divides into several different price versus value segmentations, for instance, think about pricing on each tier. Lower-priced offerings could benefit from price cuts. Still, higher price point customers might see enough value in the product to keep on purchasing or purchasing with incentives such as bundling, with no difference in price. In other words, don’t wield an ax on across-the-board price cuts.

2. Keep track of data on any price leakage

Many companies couple their recession price cuts with sweeteners, such as free shipping, extended payment terms, or complimentary customer support. Despite being “free” or reduced, these, in fact, do cost your company some cash. The result is known as price leakage.

Don’t let these and similar programs erode profits. They can be just as damaging as indiscriminate price cuts if not monitored and controlled.

3. Be dynamic on pricing strategy

Similarly, your company should keep track not only of data but also of analytics. Real-time pricing is dynamic, and lets you know when markets change. Recessions are not static, after all. There are signs of a pick-up before news outlets announce it. If customers become either more resistant to purchasing your products or more apt to, you want to have analytics in place to know that.