4 Marketing Strategies For Deflationary Times

The Fed has promised to keep interest rates low for the next two years.  The housing “bubble” and foreclosures are keeping the housing market down, unemployment is now projected to be around 9.0%+ through 2012 and some are projecting a double dip recession.

Clients are asking for advice on Marketing strategies if we enter into a deflationary period.  In this context deflationary means that the buyer feels that the product/service he/she is going to buy will be cheaper in the future, so the right economic decision is to hold off on the purchase.  (In inflationary times, the opposite holds, they buyer thinks that the product/service will be more expensive in the future, and the right decision is to buy now.)

There are four main strategies in this race to the bottom.  One is to price your bundle of goods and services at the level of your fixed costs, which should result in a significant price reduction.

Pros – This action will drive added volume to your business with appropriate gains in market share and potentially thought leadership.

Cons – You will be seen as the price leader, which is often not equated to quality.  Additionally, if you are truly pricing at the level of fixed costs, you will have no flexibility if one of your competitors has a lower cost basis and matches your prices.  And, going forward you may have difficulty raising prices when the economy turns around.

A second strategy is to first unbundle all your goods and services, pricing them on an individual basis.  Then provide some of the goods, features or services on a no-cost basis. 

Pros – Greater flexibility in pricing; the value of each of you components can easily be seen and it will be easier to raise prices in the future.

Cons – A price leader could gain significant market share if you delay implementing this strategy.  And, this strategy requires an obvious, quantifiable value to the various pieces.  If this is not present, then the strategy cannot be implemented. 

Some fully integrated software products and computer “appliance” vendors may have difficulty in following the second strategy. In these cases our recommendations have been to revamp their product offerings into the classic “good, better, best” offerings, with visible and quantifiable differences between the three.  With this structure, the good product can chase the price leader down, while the better and best products are available for quality comparison.  Of course the expectation should be that the “good” product will be the volume leader.

A third strategy is to offer financing terms, i.e., volume discounts, trade-in/trade up programs, delayed payments, etc.  A working assumption is that you can afford to carry the cost of financing your sales.

Pros – Financing programs add to the “stickiness” of your sale, helping to ensure that the customer stays with you for a longer period.

Cons – Too many or complicated programs can confuse the buyer, making their comparison with lower priced alternatives more difficult, resulting in your offer being rejected.

A fourth strategy is to focus on the values delivered by your product, i.e., faster greater ROI, ease of installation, ease of use, etc. as compared to the lower priced competition.  This differentiation strategy requires that your values can be quantified and easily understood.

Pros – This strategy takes the conversation away from price to value which, if it can be quantified in your favor, should move the buying decision to you.

Cons – Competitors will rapidly close the value difference, either by introducing new products/features or lowering their prices, so continuing investment in product innovation and new product introduction has to be part of this strategy.

Looking at the Japanese experience and our previous periods of stagflation, a period of deflationary activity can be expected.  Understanding your buyer behavior and planning accordingly is the key to long term survival.

As CMO, do you know what your fixed costs are and the true unit costs of each of your product offerings and have you thought through a strategic approach for deflationary times?  Having this will allow you to have in place the right strategies when your competitors start a race to the bottom.

 

(This is additive to the article I wrote last year about the same subject.  See: https://firealarmmarketing.com/2010/07/22/deflation-and-pricing-6-suggestions-for-the-cmo/ dated July 22, 2010.)

RHM  8/25/2011

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