Cutting prices in a recession? No way! Part 1

Alan Radmall

During a recession consumer spending drops. The retail market becomes more competitive. Marketers often need to change tactics. Cutting margins and lowering prices is often the first step to maintain market share, but is this the right way?

How sensitive is the customer to the price of your products at retail? Not as much as you think according to a couple of articles in the Harvard Business Review! In the Review Anderson and Simester wrote:

“For most of the items they buy, consumers don't have an accurate sense of what the price should be. Research shows that consumer's knowledge of the market is so far from perfect that it hardly deserves to be called knowledge at all.”

The Review details how Professors Peter Dickenson and Alan Sawyer from universities in Florida asked supermarket shoppers the prices of products they placed in their trolleys. Less than half the customers gave a relatively accurate answer. More than 20% could not even venture a guess: they had no idea of the price of the items they were buying.

Price bracketing

Retail is focused on price and that is an intrinsic part of being a trader but it's difficult (not impossible) to build a unique long-term brand position on price alone especially when the research shows customers are not too price savvy. The fact is consumers have a wider than expected price bracket in which they place products and knowledge of these price brackets gives you the power to price to get the best margins.

Unless prices drift outside these price brackets, retailers and manufacturers can often price their products higher than they think without losing sales. That is the skillful part of marketing. Determining where to fight on price and where the opportunities lie for additional margin and profit. Get to know the brackets and you will make more money. Back to the Harvard Business Review...

“Is this because they don't care what kind of deal they are getting? No. Remarkably, it's because they rely on the retailer to tell them whether they're getting a good price. In subtle and not so subtle ways, retailers send signals to customers telling them whether a given price is relatively high or low.”

The magic of 'sale'

So the customer relies on the retailer to tell them is the price is good. The writers go on to give us some excellent examples. They tested several mail-order catalogue apparel price points and found that by just including the word “sale” beside a price on an apparel item they can increase demand by 50%. Add a sign and increase sales by 50%? Unbelievable.

They also tested the benefit of adding sale signs across the frozen fruit juice category in a Chicago supermarket. Sales increased sharply - up to the point that 30% of the products in the category were marked with a sale sign. Increasing the “sale” beyond 30% of products started sales to decline. “Sale” is a magic word that can be used at any time to increase sales while maintaining margin and should be on some of your products or in store somewhere 365 days a year if this research is to be believed.

“Using a '9' at the end of a price to denote a bargain is so common you'd think customers would be numb to it. Yet in a study they increased demand by a third just by changing the price of a dress from US$34 to $39. Increase the price and increase sale? Incredible. And when they tested the price at $44 they maintained the sales levels of the $34 price.”

Increased sales by over 33% - by increasing the price. Wow. But test your family, friends and colleagues to guess prices on common items and you will be amazed how inaccurate they are and how wide the price bracketing is. So who would believe you can increase the price or just add a sales sign to increase sales? Up until now - not me.

Part 2 of this series will cover: What can you do to increase sales and increase margins?