In a downturn, some consumers and businesses cut back because they just don’t have the money to spend. Many more prospective customers have the money but feel uncertain about the future. Spooked consumers won’t buy more until they feel that it is safe to do so, or until they decide that prices have dropped as far as they’re going to. A company needs to understand its customers well enough to know which of these factors is more important. If your customers can afford to buy but are nervous about doing so, lowering prices may not be the right way to help them overcome inertia. Rather, companies can ﬁnd ways—by combining pricing with other marketing efforts—to send the message that buying is a low-risk decision.
Take cars, for example. Plummeting employment doubtless contributed to the sharp drop in auto sales in 2008 and early 2009. But fear of job loss probably kept many more potential buyers out of dealer showrooms. Cars are a big-ticket item, and most customers can delay purchases by a year or two. In response, auto companies typically slash prices in a downturn. Most of the big players, desperate for sales, did it this time around. But Hyundai took a different tack. Recognizing that its customers weren’t likely to respond to the usual rebates or incentives, the Korean car maker announced a plan that would allow customers who lost their jobs to return a new car. The reasoning: A fully employed customer can afford the full-price car nearly as easily as the discounted car. But a customer fearing layoffs is more likely to hold off on big purchases. The strategy is powerful because it addresses what goes on inside a customer’s head, not what goes on in an economics textbook. It carries some risks, but it is not as risky as watching sales plummet—and indeed, Hyundai’s sales were up nearly 5 percent in the ﬁrst several weeks of 2009, compared with the same period in 2008. Overall auto sales, meanwhile, had dropped 40 percent.
Source: “Price for Today and Tomorrow “
Original Publication: Bain