If you are passively observing market prices at this time, your initial answer to the question posed in the title would be “Yes, products do get cheaper.” However, if you dig a little deeper, this is actually not the case – for most companies, at least. In this article, we will be discussing more on products getting cheaper in a recession.
Products: Cheaper in a Recession?
In order to survive in a dwindling economy, companies can’t afford to give their products away at very low prices just to gain the attention and preference of the masses. At first, it would seem that selling at a lower price would be the ideal solution to a hesitating market. After all, aren’t people more inclined to make purchases when they know they’re getting a good bargain? However, no matter how desperate companies are to sell, most of them would hold off on the idea of selling their products and services dirt-cheap.
For one, it’ll further destabilize the already unstable market.
Two, there is practically little to no merit to selling products and services at ultra-low prices – unless the product concerned is perishable and the company could limit losses by selling them at a lower cost.
Lastly, selling at lower prices does not guarantee higher profits so many companies are reluctant to go with this pricing strategy.
Say, for example, you are selling something at £10 apiece and currently, you are only getting 100 purchases of that product per month due to the recession. Let’s say it’s just a 10th of the number of purchases you normally get when the economy is doing well. If the base cost of producing that product is £4, inclusive of labour and other production costs, you profit £600 for the 100 purchases.
Since there is a recession, you decide to cut back the price to £7 to encourage more customers to buy. Your sales go up by 50% or 150 purchases per month. You total £1050 in revenue that month. If you deduct the base cost of the product from the total revenue, you profit £450 for the 150 purchases. More work involved, more resources consumed, but for less returns.
This is why lowering product prices during a recession is not the best course of action to consider. There is practically no guarantee that so much more customers will purchase from your business if you offer your products cheap. In fact, making this move might even contribute more to your business’s losses.
If Products Aren’t Getting Cheaper, Why Do I See Product Prices Drop?
I did say that most companies would not drop their prices drastically. In other words, products are NOT getting cheaper. It’s a counterproductive strategy that does not have such promising returns to businesses. However, while products are not literally becoming cheaper, they are made to be perceived that way.
That’s right. There are many ways a business can alter a consumer’s perception of market prices.
One way is by reconfiguring product packages. Companies can rearrange or reconstruct their set offers to make it seem like the products have become cheaper without making the products lose value, or without them having to cut back on the products’ actual prices. For example, if product A & B are high-value items and product C & D are cheaper varieties, instead of bundling A and B together, the company can repackage it to A & C and B & D and offer each set at a lower price value. Therefore, creating an illusion that prices have dropped. Companies may also choose to unbundle all packages and sell each item separately to make them more competitive in terms of price.
Pricing Example: Cheaper in a Recession
Another example is when companies apply product psychology. Companies may choose to display high-priced items beside their cheaper alternatives with the full intention of giving cheaper products more buyer attention. They may purposefully spike some items prices to provide alternative products with a clear contrast in terms of pricing.
“Staging” products are especially important when it comes to selling, after all. It’s kind of similar to how subscription-based businesses would mention the equivalent daily price of a service or product instead of listing the monthly or annual payment outright. It helps people get a better idea of what they’re paying for and the value it adds to their lives.
Lastly, some companies might even include “value-adds” to their offers to make consumers think that they’re getting more than what they’re paying for in terms of value. Most value-adds won’t even have a monetary equivalent; it won’t necessarily require companies to spend more on the creation of the product or service.
A warranty, for example, is something businesses can offer as an addition to their product. The same goes with “satisfaction guarantees” and “free exchange policies.” Airlines at the present time, for instance, are offering free rebookings and rescheduling of flights should they be interrupted by the ongoing coronavirus situation. These value-adds appease customers’ buying anxiety and makes them feel that they’re receiving more than they have actually paid for. If you’re a seller and you believe that this type of strategy may be applied to the products and services you offer, it’s high time you begin thinking about what more you can add to your offers to make its perceived value go up.
Wrapping this up as well
If you’re a business owner yourself who’s looking for a way to save your company during and after the anticipated Coronavirus recession, you can reach out to Annette & Co. for a FREE business consultation.
If you want to know more about how you can increase your profits during this uncertain time, you can also check in on my weekly Podcast – Uncover Wealth Radio, and YouTube channel, Annette Fergs TV for more valuable tips and updates for UK businesses.