Pricing in an Economic Slowdown

According to the National Bureau of Economic Research (NBER) in the US, the definition of a recession is “a significant decline in economic activity spread across the economy, lasting more that a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales"1. The more commonly accepted definition is two consecutive quarters of falling output.

It may still be a little too early to tell whether economies like Australia, the US and the UK are officially in recession or not, but either way, it is time to start thinking about and preparing your pricing strategies for use in a possible economic downturn.

Several articles have recently been published on how marketing strategies should be adapted for an economic slowdown, but they hardly, if at all, touch on how pricing strategies should be modified. In this post, we seek to redress that situation.

John Quelch from Harvard Business School wrote about strategies for an economic downturn in a recent article in The Financial Times2. He makes a number of good marketing –related recommendations. Below, we reprise those recommendations and go one step further, drawing out implications from a pricing perspective:

Recommendation 1: Focus on Quality

The Rationale: Companies that cut back on the quality of their products and services may find it comes back to haunt them when the economy recovers.

The Implications for Pricing: If you want to, or have to, reduce the quality of products and services, adjust your prices in the same direction as well.

Recommendation 2: Close under-performing areas of the business

The Rationale: This can apply to retail locations, as well as to products and services. It may be better to proactively rationalise now, rather than having to take a reactive, broad-brush approach later. Locations, products and services that are candidates for such action include those that are unlikely to rebound when the business climate improves, based on a re-forecasting of demand.

The Implications for Pricing: If you scale back your retail or trading locations, or your products and services, provide alternatives or transitional arrangements for those customers who may be adversely affected.

Recommendation 3: Buy up financially week competitors

The Rationale: The cost of acquiring financially week competitors may be significantly cheaper than it would be in times of economic prosperity. Particularly attractive will be companies whose customers currently don’t buy from you.

Implications for Pricing: M&A activity provides enormous pricing opportunities in terms of the added value that the merger may create. This should be capitalised on.

Recommendation 4: Expand relationships with customers

The Rationale: In the interest of cost efficiencies, companies will be looking to consolidate suppliers during an economic downturn. It is not a time to cut back on market research, as in times like these, it is even more important than ever to understand customer price elasticity.

Implications for Pricing: Companies should also consider long term supply contracts, and potentially (cost-effective) loyalty and retention programs.

Recommendation 5: Support Distributors

The Rationale: The business model of distributors can come under a great deal of pressure in times like these. Any initiatives that reduce their working capital or excess inventory requirements should be favourably received. Companies may also consider dropping weak distributors.

Implications for Pricing: It might be worthwhile thinking about support measures for distributors, such as early buy allowances, extended finance or improved returns policies.

Recommendation 6: Understand competitors costs structures

The Rationale: As they say, “you’re only as smart as your dumbest competitor”, and some competitors may attempt a market share grab in difficult economic times.

Implications for Pricing: Understand the impact of price wars and price reductions

Quelch does have some specific recommendations around pricing. Recognising that customers will shop around more, he suggests temporary price cuts, reduction in quantity discount thresholds, extended credit facilities, and more aggressive pricing on small-sized products.

There are a number of pricing and advertising additions to these suggestions. Firstly, those temporary price cuts and reductions in quantity discount thresholds should be for a fixed and defined period of time, not for an open-ended duration. The last thing you want to do is condition you customers to cheaper prices infinitum. In some industries, such as mortgages and mobile telephony, customers might look for invoicing and budgeting certainty and switch to fixed interest rates or capped phone plans. Make sure these prices are optimised sooner rather than later. And finally, if there is still money left in the advertising budget, consider spending it on price comparison websites (such as moneysupermarket.com) which is where the price sensitive customers will be looking for the best deals.

Another recommendation comes from a recent Business Week article3, which recommends companies increase financial and operational reporting frequency. This will enable you to monitor trends in sales volumes, revenues and costs, but also keep an eye on the number of days customers take to pay their account. If customers take longer to pay their bill, it might be worthwhile giving them a call, and re-thinking how you “get” your prices and possibly renegotiate payment terms and conditions.

Although the short term outlook for some sectors of the economy is not that rosy, strategies such as those outlined above can go some way towards easing the pain.

References
1 Anon (2008) “The long hangover” in The Economist, 12th April, pp79-80
2 Quelch, J (2008) “Family comes first when marketing faces tougher times” in The Financial Times, 18th February, p14
3 Anon (2008) “Don’t Let the Downturn Get You Down” in Business Week, 20th February, downloaded from www.businessweek.com on 2nd March 2008

Another Low Cost Airline Pioneer Passes Away

Last year, I commented on the passing away of Sir Freddie Laker, one of the pioneers of the low cost aviation movement.

Sadly, we've just lost another pioneer - Tony Ryan, who formed what is now Ryanair. You can read the New York Times obituary here.

What do the FT, Radiohead and campaigners against ticket scalpers have in common?

A couple of interesting pricing stories broke overnight. The first comes from the website of London Financial Times, which preempting a similar move by Rupert Murdoch at the website of the Wall Street Journal, announced that it was making much more of its content available free of charge. You can read coverage from the Sydney Morning Herald here, and from The Independent here.

Another big story, reported by the ABC here, and the BBC here, was the decision by the band Radiohead to let fans determine how much they want to pay for their next album – even nothing if they so wish. There are a number of restaurants around the world that offer this sort of pricing model, including one here in Melbourne in the beach side suburb of St Kilda. I can’t remember who told me this, but I do recall hearing that the owner of this restaurant in St Kilda operates a number of eating houses, and guess which one is the most profitable? The one where diners pick the price they pay.

The final story is this one from The Age which talks about how music fans are fighting back against ticket scalpers.

This Week's Pricing Wrap

There were a couple of interesting pricing stories that caught my attention this week. You may recall my posting on the 20th August which talked about a couple of UK supermarkets possibly being a bit too demanding on their suppliers during a price war earlier this year.

Well, the UK supermarkets are under the spotlight again, this time for (apparently) fixing dairy prices. The BBC carried the story on their website here, while The Independent’s story may be accessed from here. An accompanying piece carried by The Independent asks “The Big Questions: Have supermarkets become just too powerful in Britain?" Good question, the article presents both sides of the argument, but at the end of the day, I think the customer will decide.

The other big story of the week came from The Guardian that reported that Rupert Murdoch is (still) considering the possibility of making the content of wsj.com (The Wall Street Journal) available for free. In my opinion, wsj.com is perhaps the best monetised site on the web, however, as the article points out, the trend is in the opposite direction:

- The LA Times has recently dropped fees, and

- The New York Times has also recently stopped charging for TimesSelect (its archive and influential columnists), which has over 200,000 subscribers.

I wonder whether these developments will be digested by the folks at the Australian Financial Review, who on Friday admitted that they had got their site wrong (www.afr.com.au) (too much Flash, little free content). The site will go through its second overhaul this year in the next couple of weeks – it will be interesting to see if pricing is part of that overhaul.

Professor Sir Clive Grainger

Last Wednesday night (12th September 2003), I went along to a free lecture given by one of the winners of the 2003 Nobel prize for Economics, the author of 12 books (one of which I used in my under-graduate degree) and over 250 articles and, a person who, by some accounts, is a bigger Welsh hero that King Arthur (I didn’t even know King Arthur was Welsh!).

The man in question is Prof. Sir Clive Granger, and the topic of his presentation on Wednesday night was "trends" (particularly in time series data), although there was quite a bit of discussion about forecasting as well. Trends and forecasting are both related to the art and science of pricing, so I thought I’d use this posting to talk about some of the key message I got out of the lecture…

Firstly, apparently no one has ever defined what a “trend” is, a term that first came into use in 1901. Interestingly, the word “trending” has been used since the 16th or 17th century. One commonly used definition is that “one end is different to the other end”, which would suggest that a flat line is not a trend;

There can be trends in levels (i.e. an upward trend), but there can also be trends in volatility – worth keeping in mind;

You can’t judge a trend – you need to know what’s going on behind it, what’s causing it. Prof. Granger suggested that the trend of Shanghai A-share index between 2002 – 2007 is a bubble, caused by the psychology of the investors

You can’t effectively forecast the economy more than three years in advance

What’s easy to forecast…things like population trends

What’s hard to forecast…exchange rates, stock market indices, anything related to an industry where policy issues matter, commodity prices and anything in a speculative market

What are we getting better at forecasting…demand for electricity (apparently)

One year

A couple of years ago, the online travel portal, Expedia, posted a price of $2 - $4 per night for a stay at the Tokyo or Osaka Hilton. Unfortunately for the person who booked a one year stay at one of the properties, the error was not honoured.

But here's an interesting story from The Daily Telegraph of a couple who have been living in Travelodge properties for the last 22 years. Turns out their move has been cheaper than aged care.

Having stayed in many Travelodge properties on my travels through the UK, I wouldn't say 22 years was my kettle of fish. But the Davidson's obviously don't mind it...

''It doesn't get much better than that does it? We only have to walk across the car park for meals as there is a Little Chef here too.''

''Our room looks out to the car park and a busy slip road where lorries pass by throughout the night.''

Good luck to them. What the pricing moral of this story? Be aware of who your competitors are, event the indirect competitors and substitues, as well as their prices.

Pop Economics

I’m a little bit behind in my reading at the moment, so I apologise if this posting sparks an interest in an edition of a publication that is no longer available in print on the newsstands.

I’m very interested in the role of pricing and disruptive technologies, such as Skypes’ impact on traditional telco’s pricing models, or digital photography’s impact on ‘analogue’ photography. Pop Economics, written by Robert Sandall and published in the August 2006 edition of Prospect Magazine is one of the best articles I’ve read on the economics of the music industry.

The articles opens with the story of a band that stops selling their $10 CD’s at concerts because it was cannibalising sales of its $20 t-shirts. I’ve previously spoken about rock ‘n’ roll t-shirt pricing here.

Why did Prince give everyone attending his shows at London’s O2 arena in August, and readers of The Mail on Sunday, a free copy of his Planet Earth CD? The reason is perhaps best summed up by the guitarist from Anthrax, who say “their album are the menu, the concert is the meal”.

In effect, recorded music is becoming a loss leader….but how did the industry get there? Well, apparently it’s partly got itself to blame. Free-to-air radio commenced in the 1930’s. 12” LP’s were the dominant music format until the mid 1960’s when the 7” single took over. Then along came CD’s in the 1980’s, hoping to persuade everyone to replace their vinyl records collections. The “Home Taping is Killing Music” campaign reached its peak in the 1980’s and by 1994 the CD had become more popular than cassette tapes, which had sparked that campaign. But, as the article discusses, record companies were selling CDs and giving away their master tapes. And of course, we then get into Napster and iTunes, which brings us up-to-date.

So while the pressure on recorded music pricing has been all downwards, it’s the opposite in live music: the trend has all be upwards, and I’ve also commented about this in other blog postings, as does Pop Economics: in the 1980’s the price differential between a Madonna CD and a ticket to one of her concerts was negligible. A ticket to see her at Wembley last summer was more than twice the price of her entire back catalogue.

The last paragraph of the article is one that I’d like to quote in full, because not only does it apply to pop economics, it also applies to many Web 2.0 sites, which I’ve also written about in the past. It reads:

In his book e-Topia, William Mitchell relates the increasing value of shared
experience to the isolated nature of electronic or online virtual worlds. “in
conducting our daily transactions, we will find ourselves constantly considering
the benefits of the different grades of presence that are now available to us,
and weighting these against the costs” he writes. Being in the same place at the
same time as a live performance, music fans appear to have decided, is the
rarest and most precious presence of all.

The iPhone (Nbr 2)

Well here's something you don't see very often....a company giving compensation to customers who previously purchased, at full price, a product that has subsequently been discounted.

A $US100 voucher to those customers who purchased the 8GB iPhone. And the 4GB iPhone? Well, thats been discontinued altogether.

The iPhone (Nbr 1)

When the iPod first came out, some people thought that iPod stood for "idiots price our devices". When the iPhone first came out (on 29th June this year), some commentators (like this one and this one) suggested that the iPhone was underpriced.

Not according to Apple and the New York Times, which is just one of many publications around the US and the world, covering today's unexpected iPhone price cut.

A digital set-top for £10 ???

An avid reader of this blog kindly sent me a link to a very interesting story on the BBC website, which you can read here.

The email continues...

[I] didn't see this whilst shopping at Tesco tonight (wasn't even looking) but did notice some strange price differentials - nothing new but it gets me wondering: Why should brown wholemeal pasta be 50% more expensive than white - same brand, same shape pasta, same size pack. It's the "Healthy" premium I suppose. And Organic: sometimes products twice as much and some the same price or even cheaper than non organic.

Or perhaps brown wholemeal pasta is just being sold above cost...unlike the £10 digital set-top boxes :-)

Rip-off Ryanair?

I am still in the UK, where there hasn’t been much of a summer, except for this bank holiday weekend, which has been absolutely magnificent. So while I was reading the papers over the weekend, I stumbled across the news that the folks at Ryanair are about to start charging £4 to check-in. Don’t believe me? Read it here.

I tend to agree with the comments in this article that this charge is pushing things just a little bit too far. Yes, the low cost airlines have unbundled the traditional flight ticket to a pay-as-you-go model, and they have made air travel more affordable to the masses. But, to be blunt, this charge will piss customers off. And it should play nicely into the hands of airlines like easyJet (no, I don’t own stock, but I did used to work for Stelios), provided they don’t become too greedy.

Guess I was wrong with my February 2006 prediction that the toilets would be the next thing to be monetized.

Some news on supermarkets and search engines

One of the main differences between an everyday low pricing (EDLP) strategy and a high/low pricing strategy is that the former is often retailer lead, while the latter can be more supplier lead. Today’s edition of The Guardian newspaper carries a story on just how much an EDLP strategy may be retailer lead.

When I was last here in the UK in June, a banana price war broke out, and subsequently spread to other products. In the process of completing a study on the way the UK supermarket industry operates, the Competition Commission has discovered that a couple of the supermarkets may have been a bit too demanding of their suppliers during this price war. You can read the full Guardian story here.

Meanwhile, and this isn’t exactly a pricing story, Google is finding itself in a bit of hot water of late. As this story tells, it is reportedly being sued by American Airlines, who are finding that users who search for the airline are being given sponsored links to AA’s competitors in the search results. A similar practice was discovered in Australia a couple of weeks ago. A search engine, such as Google, is a two-sided market. It must please both its users and its advertisers, though Google only monetises one side of this market (the advertiser). But clearly, failure to provide its users with relevant search results can be detrimental to its cost-per-click revenue stream.

Pricing Nostalgia

This week’s blog posting is all about pricing nostalgia. You may recall my posting back in November last year about the price of U2 tickets….in 1984 ($19.90).

Well during the week, I stumbled across a website with a fantastic name (http://www.ticketsonyourself.com) which sells T-shirts with old (and some not-so-old) concert tickets printed on them.

There have been many reasons put forward for concert ticket price inflation over the years. Some authors have blamed The Eagles (people were always going to pay once Hell Froze Over), while others suggest that as sales of recorded music has declined (thanks to Napster, and more recently iTunes), artists have re-balanced their revenue stream, by increasing live performance ticket prices and thus revenue.

It’s great to flick through the t-shirt designs on offer on this website, and not only see some of the prices (Woodstock at $8 per day, or $24 for all three days – perhaps bundling hadn’t been invented then?) as well as some of the support acts (Bob Dylan with Eric Clapton and his Band).

Enjoy.

The price of dying...in Moscow

Here’s an interesting article from The Moscow Times on the cost of dying, which is possibly an example of poor pricing, poor economics, poor journalism, or possibly all three.

In the second paragraph, the article mentions that the costs of a new grave in Moscow is currently 4,400 rubles, but the state provides 5,700 rubles towards the cost of burials, suggesting that the municipally-owed burial service, Ritual, would be 1,300 rubles ahead on each burial. Could this be what makes Russia one of the world’s most dangerous places?

The other interesting comment is the sentence “One reason for changes in prices is that the number of burials of low-income individuals as increased”. Does this mean that the price increase will lead to more high-income burials?

Hmmmmm