Focus on Your Customer Not on Your Price

With the effect of the global recession still being felt around the world, organisations may be tempted to look at price cutting strategies to retain their market share, yet some researchers suggest that this may not be the most sensible approach and could lead to an eradication of your future market share. Marco Bertini and Luc Wathieu wrote in the Harvard Business Review, May 2010, that “many, perhaps most, markets today are mature enough to feature intense price-based competition. The constant undercutting to capture customers sometimes spurs efficiency gains, but more often damages brand equity and erodes profit margins. To make matters worse, customers in these markets develop low expectations and grow disengaged: They fixate on price and lose interest in marketing communications and all but the most radical innovations,” (p.85-86).

When developing ‘survival’ strategies, organisations have to look beyond the short-term to see the future ‘state’ they are proposing. A price reduction can always be one of your strategic options, but you need to ‘play’ this scenario out to fully understand the implications it will have on your business, which goes far beyond a reduction in profit margin.

When considering a price reduction strategy to ‘keep’ your existing customer happy, you should consider and analyse the following, which may have significant medium to long-term implications for your organisation;

1) When the market turns the customer can be so fixated on your price that you will find it hard, to impossible, to increase prices back to pre-recession levels. Leading to a significant loss of revenue and brand/image status;

2) If your price reduction attracts new customers do you have the capacity to meet this new demand and what are the implications on the organisation, both short-term and long-term. Increasing capacity now, only to see it eroded when the market turns again can leave the organisation in a further financial crisis;

3) What implications does a short-term price reduction have on perceptions of your organisation and brand in your market?

As Roger Martin (2010) says, “determining what your customer’s value and focusing on always pleasing them is a better optimisation formula. Of course, companies face obvious constraints on customer satisfaction; they’d quickly go bankrupt if they made customers happier by charging ever-lower prices for ever greater value. Rather, companies should seek to maximise customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity,” (p.62).

In a state of reactive ‘panic’ it can sometimes be too easy for organisations to rush the strategic decision making process, and go for the price cutting option. This can seem the easiest option to implement at the time and perceived to give immediate benefit to the organisation, without analysing the medium to long-term effect on the business. The excuse can be that if we don’t so something now, we won’t have a medium to long-term to worry about - but the reverse is just as true, if you make the wrong strategic decisions now, without proper and effective business analysis, at best your organisation will never fully recover and at worst it won’t survive the upturn in the market.

When customers only consider price in their buying decision, they have effectively commoditised the product. Bertini and Wathieu highlight how “research shows that commoditisation is as much a psychological state as a physical one. A commoditised market is one in which the buyers display rampant scepticism, routine behaviour, minimal expectations, and a strong preference for a swift and effortless transactions regardless of product differentiation. The key, therefore, to escaping commodity status is not what you do to your product; it’s what you do to your customer. You must find a way to reengage a buyer who is past caring – and to do that you must make the customer sit up and take notice,” (p.86).

Even in times of crisis it’s worth spending the time to analyse and define the best strategic options to take you forward as an organisation, ensuring sustainable growth, rather than a quick and easy short-term fix - often what seems the easiest option is not the best option.

References

Bertini, M. and Wathieu, L. (2010). How to Stop Customers from Fixating on Price. Harvard Business Review, Vol. 88, Issue 5, p.84-91.

Martin, R. (2010). The Age of Consumer Capitalism. Harvard Business Review., Vol. 88, Issue 1/2, p.58-65.