What price a price cut?

A KPMG report out today says that UK firms are paying the true cost of inflation and slashing prices to an unsustainable level in an attempt to maintain customers and turnover.

As we wade our way through the worst recession in living memory, it is dichotomous that the high-end brands such as Hermès and Rolls-Royce are continuing to flourish.

At the other end of the scale, bargain brands are also increasing their share of the market. This can be seen, for example, in the hotel sector, where value hotel chains such as Premier Inn and EasyHotel are doing very well indeed. The EasyHotel chain has recently opened a 216-bedroom hotel in Dubai.

The brands which have suffered most and seen their sales stagnate or fall are the mid-market ones – those caught in a pricing ‘no-man’s land’.

This begs the question, how does one position a product or service during a recession? If we aim for a middle of the road price point, which, from the outside, might look like a sensible option, are we setting ourselves up to fail?

The question vexes business people up and down the land and the answer lies, not in the price, but in the clarity and consistency of the proposition.

RyanAir, Lidl and others do well because they are unambiguous about what their offer is and have put as much thought into their positioning as the top brands.

Equally, the top-end brands are unashamedly proud of the prices they charge, confident in their quality and clear about who their target audience is.

But what about the mid-market? Not every business wants to offer bargain basement pricing, nor indeed can command premium pricing.

If a business decides it wants to target the mid-market, then it must look to position its brand where there is a gap in the market – but not lead on price. Instead, it must find another point of difference, another reason for clients to choose it. This could be quality of service, level of expertise or the something unique that it offers.

Certain types of customer will take reassurance from a higher price and see it as a sign of quality and expertise. If this is where you are, don’t waiver and dilute your brand by slashing prices when demand falls. Hold your nerve, because once you have lowered your price it is very hard to increase it again.

Indeed, the worst thing any of us can do is confuse our customers by suddenly setting our prices lower because of the current economic climate, or simply to get a foot in the door – they may see it as a sign of desperation.

As our accountants will swiftly remind us, selling more products more cheaply isn’t necessarily a successful exercise. For a start, our margins will be less, so we will need to sell more and this may mean a larger investment in production and advertising. Successful ‘bargain basement’ brands spend a lot of money on getting their message out there.

Pricing and positioning a brand is a key aspect of the marketing process and something we spend a lot of time talking to our clients about. The key for any business is to know its target audience and, importantly, know on what basis it is going to compete. Once that is known, entrepreneurs should build a pricing policy and stick to it.

What price a relationship?

Business life is rarely without its ups and downs and there are occasions when we all have to call in the odd favour.

Such was the case this week, when an issue arose with an advert for one of our clients. With the fault laying fairly and squarely at our door, our first response, after apologising to the client, was to arrange to run the advert again at our expense.

Having worked with the publication in question for many years, and purchased a reasonable amount of advertising from it, we asked for some leeway on the price. The response was an uncompromising 'No. This is your problem, not ours'.

This might seem perfectly reasonable. After all, why should the publication compromise its margins to help us out, particularly in these straitened times?

The answer lies in the pricing strategy.

The incident brought home to us that what we had seen as a relationship, the publication prefers to treat as a series of unrelated transactions, each to be exploited for the maximum possible price. No value is placed on our future spending power: the priority is to maximise revenue now.

This is a legitimate pricing strategy, but not without its consequences.

The discovery forces us to re-appraise the way that we will do business with the publication in future. The loyalty that we have felt towards it now looks misplaced and leaves us feeling a little foolish. We must now start to treat each transaction as the publication does and judge it primarily on price. We are also motivated to look more closely at the competitor publications and get to know the people behind them a little better. These are all the characteristics of a transactional relationship.

In contrast, a small concession would have deepened our sense of loyalty, encouraged our advocacy and even left us feeling a little in the publication's debt.

The publication has great confidence in its brand and, if it is right in its assessment that it is the No1 brand in its niche, it can indeed dictate terms in this way. For most businesses, however, applying transactional pricing in a relationship situation is a dangerous and short-termist approach. The pursuit of margins, in the absence of, or at the expense of customer loyalty, ultimately shifts economic power to the customer. Customers quickly leave when a better offer arises elsewhere.

Sour grapes? We hope not. We accept our misjudgment of our worth and respect the publications right to act as it pleases. We are happy to work under the new rules.