Tuesday, March 3, 2009

Is Cutting Prices a Good Strategy?

We have been talking a lot about how pricing strategy plays an integral part in business sustainability and success, and have been focusing on the numerous pricing strategies being employed in various industries to survive the current economic downturn.

One of the primary issues for many businesses, as we have pointed out, is the decreasing amount of expendable income consumers have at their disposal. So what are businesses to do to maintain as large a piece of the dwindling pie as possible? Some businesses are using demand pricing models, while others are choosing to focus on the value proposition that their product and services holds that sets them apart from the competition.

Still others, primarily in retail up to this point, have been cutting prices. Now we are starting to see price cutting in the service industry as well. See this article which has been getting a lot of attention from pricers:
"The sour economy is forcing Valet Girls to skimp a bit.

"In better days, Valet Girls, an all-female parking company based in Malibu, charged Hollywood party planners a premium price so their guests could enjoy the novelty of handing the keys to their BMW or Bentley over to a young, tank-top-wearing woman.

"Valetgirls But lavish company-sponsored parties are suddenly out-of-favor (being seen as a sign of corporate excess during a time of belt-tightening) and Valet Girls is feeling the squeeze. The 26-year old company, which heretofore boasted an unbroken string of annual sales growth, has seen bookings plummet 60% so far this year compared to the same period of 2008.

"In response, the company laid off 50% of their staff and cut hourly pay for its valets from $10 an hour to $8. And this week, it slashed its hourly rate from $36 per valet to $26.Co-founder Nancy Saltzman said the decision to cut pricing was a matter of survival.

"We had to slash rates almost 25% to stay competitive this year," Saltzman said. "[Hollywood party planners] are now shopping out three and four quotes for valet parking where before they used to simply call and book us."

Read the full article: "Valet Girl loses steam, cuts prices". Is this a good survival strategy? Arguably the service provided by Valet Girl is far from one that is necessary for daily life, but the trend is continuing into more necessary industries as well, such as healthcare. EMRresource.com, a McKesson Healthcare blog outlining trends in the healthcare industry, recently posted: "Given the state of the economy, with a drop off in patient volume, many physicians feel their practices are at risk." Read the full post: "Is Funding Enough to Instigate Physician EMR Adoption?".

Using price cutting as a business strategy has also caused a lively discussion in the PPS LinkedIn Group:
"Would like to know if you would have recommended the action they took (to cut prices)? So now they are winning 80% of their quotes . . . but are they profitable and is the business sustainable?" (Chris Hopf)

"Only they know if they are profitable and therefore sustainable. However, to not win business is to ensure lack of profitability and sustainability. Another question is when do the owners think corporate business will rebound? The price cuts could be medium term or short term depending upon their outlook. In which case, short term pain enables them to be ready when business turns around. I wonder how much of their business is related. The parents of the groom, for instance, who sees Valet Girls work, decide to hire them for the corporate deal, etc." (Will Davis)

"Their business is quite different from many of us in that their "product" cannot be bought and stored, nor can it be transported to a different market, and they don't have significant fixed assets. They also cut their primary cost per hour by 20% (labor) while reducing their prices by 27%. So most of the price cut came from their employees who are not employed by them full-time and expecting this to be their only source of income. In many of our businesses we also have to worry about the long-term impact on price levels that a cut may have." (Stu Schlachter)

"Some thoughts: As we all know and they will likely find out . . . it will be a challenge to raise prices in the future, but maybe their approach will actually lead to them to being around in the future (to have that challenge). However, if they cannot create a profitable return on the business in the current climate, they likely won't be able to sustain the business with a low price/high volume approach. And with very little fixed dollars . . . they could simply scale way back, land the opportunities that value their differentiation (value prop) at current rates (not reduced) until the economy rebounds. Also how they are framing their message around any reduction in price will be key to their success in raising their rates in the future." (Chris Hopf)

What do other pricers think? Lack of funds both in the business and consumer markets is forcing a lot of businesses to rethink their business models. We will keep on top of these trends to make sure that pricers have the best information and tools available to them as pricing strategies become even more integral to long term success. Warmly, EM

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