It's all in the price!... Or is it?
Joe Yasin, Technical Development Director
The current deep recession and the fall in sales of many products and services drove many companies to cut their prices to keep sales up. Stock levels suitable for a previous benign environment were suddenly inappropriate to shrunken sales rates, particularly if debt loads were high.
However, when stock equilibrium is reached – and the rebound in GDP suggests that for many companies it has been – should you keep prices low to hold sales?
It's not all about price
It is important to remember that it wasn’t actually increases in prices that changed as we sunk into recession, it was the income of customers. They stopped buying not because prices had risen, but because their incomes had fallen – two very different things.
Sales of frequently purchased ‘essentials’ respond very differently to price changes (price elasticity) and incomes changes (income elasticity) than infrequently purchased ‘luxury’ items. A company’s price strategy after de-stocking is completed should depend on the nature of the market in which it competes and the nature of the brand which it is selling.
Please view this diagram for a more detailed analysis.
So, if you are a luxury ‘capital’ goods company, lowering price after the initial stock-clearance will seriously damage profits yet bring few extra sales. This is because the price elasticity of your products will be low - less than -1.0% or possibly in the case of some strong luxury brands, even positive. In fact, 2.2% of elasticties were found to be positive in a meta-study of 1,851 price studies by the Universities of Groningen and Tilburg in 2005 and positive price elasticity means that when prices rise, the customer actually buys more!
However, if you are a mid-range brand, ‘recession specials’ will keep customers and protect the bottom line if your fixed costs are high. Whether lowering the price is the right answer for you in recession depends on the nature of your market and your brands.
The two roles of pricing
The most frequent role price plays is a ‘rationing’ one, meaning that when prices rise, consumers buy less. This is partly because they feel they cannot afford to pay so much, and partly because the product becomes less desirable compared to the other things they could spend their money on.
However, price also plays another role for those products that show little price sensitivity, or even have positive price elasticities. This is because price also signals quality. In its ‘signalling’ role, used for luxury products where quality is difficult to judge, or where they are status symbols desirable for their exclusivity, or even products for occasional celebrations, the higher the price the more desirable the product and the more you will sell.
Because a product’s ‘signalling’ price can take time to convince customers, it is often not understood properly. In the short term a product may sell more on a price promotion, but if it is continually price promoted the signal sent out is that it isn’t really worth its RSP/list price and ultimately price cuts depress long-term sales.
Do you know how price acts in your market, for your brands, and the difference between the short-term and the long-term? If you don’t, it can be a very costly mistake - particularly as incomes recover and we move out of recession.
If you would like to discuss any of these issues with a Cognosis consultant, please contact us to set up a meeting
Reactions to the alcohol report
On the 25 February, Cognosis hosted a special breakfast event to consider the issues surrounding the Health Committee’s recommendations and what the implications are for the drinks industry.
Richard Cochrane, Off Trade Director of Bibendum Wine, was our guest speaker for the event. Having been involved in several cross-industry working parties addressing the alcohol issue, Richard was extremely well placed to lead the discussion.
Please click here to listen to some of Richard's insight into the issues.
In addition, the group discussed the Health Committee’s recommendations, the role of the media and the need for the industry to work together to create a coherent message for consumers on safe levels of alcohol consumption. A key focus during the event was the discrepancy among different European governments on safe alcohol consumption guidelines – discrepancies which could have a significant impact on the value of the alcoholic drinks market:
- The role of government guidelines -
alcohol Consumption per capita (age 15+) adjusted to take into account the teetotal population of each country paints a more accurate view on how much people consume in each nation. When benchmarked against national government guidelines, more countries are over-consuming than under-consuming. If each nation were to adhere to their guidelines the market would decline modestly by 5.4% representing a loss of £12bn
- The associated consumption patterns
- on the flip side consumption would fall dramatically if drinkers across the 19 nations held to UK government guidelines (14 units per week for women and 21 units per week for men). In quantitative terms, sales of alcohol would decline by 24.2% which equates to a loss in value of around £55bn
If you are interested in attending any of our upcoming events tackling the alcohol issue, please email us.
Recent Press Coverage
The Independent
'The importance of feelings'
The Drinks Business
'Thinking ahead'
The Publican
'Winners and losers'
Management Today
'The trouble with MBAs'
Cognosis News
This month, we are pleased to welcome four new additions to the company:
- Janyce Holmes joins the Executive Team as Planning/Operations Director
- Anna Chen joins the firm as a Senior Manager following her time as an associate
- Ashley Chetty joins as a Manager following his time as an associate
- Matthew Bambrough joins as a Consultant following positions at both Proctor & Gamble and Delirium Interactive
Please join us in extending a warm welcome to them all. |
