Confronted by weakening sales and excess capacity, management
teams often resort to cutting prices. It's easy to see why. Price
cuts are quicker and easier to implement than, say, introducing new
products or improving service levels. Customers often respond
immediately to lowered prices. A swift uptick in sales can
reinforce executives' belief that they did the right thing.
But there's a reason promotional price cuts are sometimes called
"management heroin." Price cuts are addictive. Customers quickly
develop a craving for big discounts and an aversion to full prices.
Companies grow accustomed to the boost in volume and hesitate to
raise prices to previous levels for fear that revenues will crater.
In a deep recession, when the first goal is survival, some
businesses have no option but to cut prices aggressively. But even
relatively strong companies experiment with heavy discounts and
then wake up to find themselves hooked.
Is there an alternative? The truth is, most companies do need to
lower prices in a downturn, whether they sell primarily to
businesses or to consumers. Demand is down, yet fixed capacity and
costs haven't changed much. So the laws of supply and demand exert
strong downward pressure on prices. Still, the range of outcomes
can vary widely in both the short term and the long term. What
matters most is how effectively companies manage pricing.
Unfortunately, yesterday's pricing textbook isn't much help with
today's conditions. A sharp, prolonged downturn creates a volatile
new environment, altering the behavior of both customers and
competitors in unpredictable ways. Companies have to act quickly,
even though solid information is hard to come by. And pricing
decisions made now are likely to affect customers' perceptions for
a long time to come. Few companies in any industry can say, "We'll
lower prices today and raise them tomorrow"-at least not without
risking a severe customer backlash.
To view larger version of this chart
In our experience, companies that get pricing right manage it at
three levels. They create a pricing strategy that fully supports
their broader objectives and positioning. They set prices on
individual products to reflect value to both buyer and seller. And
they deploy disciplined tactics to manage the aspects of the
transaction that most affect profitability. (See chart.) A severe
downturn presents challenges on all three levels. Pricing strategy
must address stark differences between the right short-term answers
and the long-term health of the business. Pricing of individual
products needs to reflect dramatic changes in the ways customers
make purchasing decisions. Tactics must be carefully designed and
choreographed to let companies execute quickly without losing
In a normal business environment the best course is almost
always to map out your strategy first, then to set prices for
individual products, and finally to design the suite of tactics
that will allow you to execute profitably. But in a recession, time
is compressed, and tactical decisions take on new importance and
To find out how some global leaders are responding to the
current turbulence with pricing moves, click here for the full article.
Ouriel Lancry is a partner with Bain & Company in
Chicago and a senior member of Bain's Global Customer practice.
Darrell Rigby is a Bain partner and leads Bain's Global Retail and
Global Innovation practices.