How to price during recession ?

Periodic recessions have become a fact of life.

During a recession, there is a broad based collapse in demand and an excess inventory. In general, the companies start reducing prices during recession. Since the competitors use the same methods, such a strategy is mostly ineffective.

A better strategy is capacity reduction but a company with large fixed cost finds it hard to reduce capacity. Hence there is a need to apply smart pricing during the recession.

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#1. Reduce prices for products that have high price sensitivity: Customers remember the prices of products they buy regularly. If a company has a good idea of price sensitivity of products in its assortment, it can reduce the prices of products that have high price sensitivity and communicate about it loudly.

#2. Goods instead of cash discount: If a company offers goods worth of $10 instead of cash discount of $10, it gets to keep the gross margin from the product. On the other hand, a lot of customers are neutral to cash versus goods. So a discount voucher works better than straight price reduction.

#3. Increase prices where customers have higher willingness to pay: Any pricing study would throw up a bunch of products which have low price elasticity. For example, a newspaper has low elasticity as people are bound by their reading habit. A company can selectively increase prices of such products. If the price increase is combined by a value add in the product, the price shock is even lesser.

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