Stephen G. Barone and Susan H. Dineen

barodine marketing communications/research/design

In a recession, it’s tempting to aggressively advertise lower prices to retain market share and move inventory. But when you advertise lower prices as a “sales reaction” rather than a comprehensive strategy, you attract the wrong kind of customer. And rather than exploit the weaknesses of your various competitors, you might inadvertently play to their strengths.  

Consider that “quality conscious” buyers value consistency and excellence over price. They appreciate and respond to your best efforts, and they’re resistant to your competitors’ discounts or sales gimmicks. They will tolerate price increases as reasonable and necessary, provided that the quality of your product or service remains consistent.

Contrarily, “Price Sensitive” buyers tend to shop around each time they require what you sell. They exert downward pressure on your margins. Also, discount advertising tends to cheapen your brand image. That can alienate your quality conscious buyers, discourage their repeat business, and thereby decimate the richest part of your customer base.

There is another danger to discount advertising. Imagine that there are three consumer products on the shelf. Yours and Brand Y are of average quality, compete fiercely, and are comparably priced at $50 respectively. Brand Z, on the other hand, is of super premium quality, costs $100 per unit, and has little customer crossover with either your brand or Brand Y.

If you were to compete against Brand Y on price, perhaps lowering yours to only $35 per unit, you might think you would draw customers from Brand Y, stealing market share, and making up in volume what you’re losing in margin. And for sure, this could happen. But just as likely: with your brand at $35 and Brand Z at $100, Brand Y becomes perceived as the middle offering.

Now, you have inadvertently repositioned your brand at the entry level. And since shoppers gravitate to a middle brand, feeling it’s the best compromise between price and quality, you lose your quality-conscious customers to Brand Y.

Subsequent responses can lead to further disaster. Your instinct might be to lower prices further to compete against a burgeoning Brand Y. Thus, you can find yourself selling at a loss while simultaneously pressing the Brand Y manager into more and more production and distribution efficiencies, allowing him to lower prices just enough to also start stealing your marginally price sensitive customers!

Or how about this: With your brand now anchoring the basement, Brand Y might be in a position to actually raise his prices, enhance his perceived value, increase his brand equity, and thus start nibbling away at Brand Z, too!

So what to do? Remember: Competing on price requires reducing cost at every level: materials, manufacturing, inventory, and distribution. If the operational structure of your business isn’t specifically designed to achieve these efficiencies, you’re going to provide your product or service at a loss.

Advertise on value instead: how your product or service delivers more for the same price.  Offer discounts, but don’t scream them, because such advertising can denigrate the relative value of your product or service in the marketplace. And once that happens, it’s virtually impossible to get people to pay more for it later on, when economic conditions improve.

Read more about Pricing Theory In The Face of New Competition.