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.
Our CEO Nick Behr’s take:
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
Get your ‘data house’ in order
Lean on your agency
Look for strategic partnership opportunities
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