Is Lowering Prices Really An Option During a Recession?

It a tough time for everyone in a recession, there are decisions to make and information to analyse. A decision that people always seem to make during a recession is to lower prices. This is done because by lowering prices, you are able to attract more attention to your product, because it is cheaper and this in turn will hopefully make people buy more of your product, because they can afford more, or they will carry on buying your product, as it is still within their budget, which will have shrunk due to everyone having less money. Consequently, this leads to revenues staying up and if you sell a lot more, profits may also stay consistent. However, is this really the best decision? In this post I will be discussing the problems which can come of reducing prices.

The Problems?

Profit Margins Will Drop

Firstly, your profit margin will most likely drop and this will lead to you still having to be running the business very carefully throughout the recession. What you will have to look at is if lowering your prices will counteract the amount of change you will have to make anyway. For example, when a recession hits, you are most likely to try and reduce costs, which will help to improve cash-flow and therefore the businesses position. You will also try and maintain your brand image, which will help people keep recognition with your business so then people carry on using you. However, is lowering your prices going to get rid of the need to lower costs? More often than not, no it isn’t, because if you lower your prices, you will have to lower your costs so that you can carry on making a decent amount of profit.

Reducing your prices, but keeping the same costs will only make things worse, even if you do see a high growth in demand, you will still need to reduce costs slightly to try and keep profits at a rate which will keep the business going.

On the other hand, by reducing the price of your product or service, it may lead to you trying to reduce your costs and therefore keeping your profit margin, whilst also gaining more customers. If you can keep the quality of your brand high, so reducing costs but still keeping everything the same, such as the same quality materials used, or the same amount of skilled labour still being employed, then you can come out of the downturn in a stronger position.

Brand Image Will Go Downhill

By getting costs down and then lowering prices, it is possible to get more sales and then keep the profit margin the same. However, is there any point if you’re making no extra money? Lowering your prices and not making any more money will not help your position during the recession and then after the recession you will have to put up with the consequences. Just because you have survived the recession, doesn’t mean you will survive the aftermath. When the economy comes out of the recession and consumers start to go back to how they were once spending their money, you could start to suffer…

By lowering your prices during the recession, you have cheapened your brand. This means that people will see your company as a cheaper place to get something. Doing this will mean you get a different type of customers and also, it will mean that you get different types of promotions, as you will have different type of people talking about your product, which will lead to a chain reaction of losing your brand image. All of this will affect the businesses brand image and reputation. When people start spending like the good old days, you will want to restore your prices to what they once were.

This is where the problems begin. The people you left so that you could lower your prices won’t want your products anymore, because the brand has been cheapened. The people who were buying your products in the recession won’t want your products; because you have now upped the price and they can no longer afford it. All of this has meant that you have lost a lot of customers and now you are struggling when everyone else is getting along just fine. This will lead to tougher competition which in turn could push you out of the market. Just when you thought everything was getting better!

Surviving

This shows that you need to think about how you will tackle your prices during a recession. You can’t just go for the easy option of, lets reduce are prices to get more customers, because it could lead to the above negative effects. Before you make any kind of decision, you need to look into what could happen and whether you have a strong enough company and brand to take the risk or not.

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