Pricing Strategies in a Bad Economy

Pricing strategies are complex in the best of times, but a struggling economy makes pricing even more difficult. The balancing act of moving merchandise while still making a profit is difficult for many businesses, particularly smaller companies struggling to survive. It is easy for salespeople, particularly in poor economic times, to become caught in the trap of underselling merchandise in order make the sale. However, this pattern will lower the profit margin and does little to actually help the company in the long-term. There are a few things to consider when establishing prices.

Pricing Factors

Believe it or not, low prices are not always good for business. Consider your business, merchandise and clientele when fixing your prices. Businesses that provide inexpensive items or serve a broad range of clientele should try to keep prices low. On the other hand, companies that offer high-end merchandise and cater to wealthier customers should be careful with low prices. Customers will question the quality of merchandise that they feel is underpriced.

Your cost and the demand curve factor closely when pricing your merchandise. There is no point in selling something if you cannot make a profit. A business also cannot survive if the profit margin is too low. Remember that your cost includes more than the cost of the merchandise. You need to factor in overhead and labor, when applicable. Underestimating your cost could cause you to sell merchandise at a loss. The demand curve establishes in what ways the price influences demand for a product. The market research you hopefully did before opening your business should answer this question. If it does not, send out a few questionnaires to people on the subject or poll people in your area.

Your ability to adjust your prices may be limited by external factors. Look at the prices of your competitors. You want to have slightly lower prices, if possible, but you do not want to engage in any price wars. Some states regulate the prices of certain services, which pretty much establishes your price point for you. Always look into legal restrictions before opening a business.

Pricing Objectives

Once you have determined what factors influence your price, you need to decide what you want from your pricing. There are several different pricing objectives to choose from. In times of economic unrest, it is easy to remain in the survival objective. The survival objective operates simply to keep the company in business. There is little thought beyond making up cost, and actual profits are put on the backburner. This objective will work for a short period of time, but profits need to be made in order to ensure the long-term survival of any business. There are several situations that can cause a company to operate in survival mode; a poor market, a price war, or market saturation will all have an adverse effect on business. Other objectives may be determined by the type of business you have as well as what type of vision you have for the business.

New businesses trying to draw in investors will often implement short-term profit maximization. This does not ensure long-term profitability, but it will provide profits quickly and increase cash flow, which proves its profitability to investors. Long-term profitability is better served with short-term revenue maximization. This works better for companies that are funded well or else begin as public companies. The short-term revenue maximization objective works by focusing on market share. Profits are not as important as revenue in this model, which makes it possible to begin with weak profits and still create credibility.

High-end companies that have sporadic sales benefit from maximizing their profit margins. The objective is simple; make the largest profit possible on each item sold. Many artisans operate under this objective to keep the company out of the red in slow times. Maximizing quantity, however, operates under the assumption that the company will sell on a large scale. This objective requires repeat customers and the ability to occasionally up sell items to these customers. The type of business that can maximize quality should have good funding from the beginning and possibly other investors.

Doing the Math

Once you have established the best business objective for your business, you need to calculate your price. You can use cost-plus pricing and target return pricing depending upon the type of business you own. Target return pricing is based on a return on investment or ROI, whereas cost-plus price is basically calculates the cost of goods plus the profit margin. You also need to study the average price point for the goods or services that you provide. Remember that even if you can extremely undersell your competition, it is not always a good idea. You could begin a price war and wreak havoc on your own cash flow.

Part of pricing is psychological. This is especially true in a bad economy. Customers determine the value of a product based on their personal beliefs and circumstances. For example, consumers who care about the environment are often willing to pay a few cents more for a product that advertises it uses fewer natural resources in its production. Take the time to understand who your customers are as well as what they need and value. Show them how your product fits in with their needs and values.

Price points are also psychological. Have you ever refused to buy something that was 21 dollars, but later purchased something similar for 20 dollars? People balk at certain price points. Fixing price points around 20 dollars is common. It is easy to pay this amount with cash, and it is comparable to the price of many other items. Going over a popular price point by just a few cents can make customers think twice about buying your merchandise. Even if you lower your profit margin a little to keep a price point, your sales should compensate for the difference.

Customers are not willing to pay for items that they believe are unfairly priced. Even inexpensive items will be shunned, if they are obviously cheap. People do not want to feel that they were scammed into paying 20 dollars for something that probably cost two dollars to make. Do your research and take note of how customers feel about the value of different products and services in your area. Just because the economy is bad, it does not mean that people are willing to buy cheap merchandise. In fact, the opposite is probably true. People expect value for their money

Taking everything into account, try to set a price that covers your cost and adds a little profit while still remaining in a price range that people believe to be fair. This will take some time and effort on your part, but the benefits are well worth the work. Underselling your merchandise and working just to stay afloat is a knee jerk reaction to a bad economy. However, it is not the best reaction. There is no way that a company that is not profitable can continue to exist. By taking the time to be sure that you are providing customers with the products they value and at prices they believe to be fair, you should be able to do more than survive the economic downturn. You should be able to thrive.

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