Reducing price in a down market is a Big mistake

As the economy sputters along, many companies are wondering what to do. How can they increase volume? How should they reduce spending? And most of all, How can they increase profits?

The biggest mistake many companies make in a down economy is to reduce their price. Price cuts do not stimulate demand. An increase in volume only happens if your product is priced above it's real or perceived value, in the first place, and consumers respond in kind to the price cut. Price cuts only lead to competitors following in kind and no one really stands to gain from these types of price wars. Cutting price does only one thing well. It cuts profit. Consider that a McKinsey study found that a 1% reduction in price would negatively impact your operating profit by 8%, assuming no increase in volume.

On the other hand, a 1% improvement in price will contribute, on average, an 11% improvement to your operating income. That is nearly a 20% differential to your bottom line. A price improvement can only happen, however, if the real or perceived value is there for the customer. This is where your marketing efforts come in to play. Marketing is about elevating your value in the market so that your customers , both current and future, are willing to pay a premium for your goods or service.

Also consider that your marketing efforts in times of economic downturn are four (4) times more effective than in upward trending markets. There are fewer competitors in the market. Of those that are in the market, many did not watch their spending during their heydays and now have very little budgeted for marketing. Media companies are feeling the effects of less demand and therefore offer better pricing or greater value to advertisers.

So when considering how to respond to the current market, take a close look at the value your offer to your customers. If it is real or is perceived as real, then do not reduce your price. Consider instead enhancing your Brand image and Brand exposure to capture market share. Improve your customer service or enhance your design and capitalize on your unique differentiating qualities. Seize the opportunity that a down economy affords you and capture as much market share as possible.

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