COMMENTARY

How An Economic Slowdown Affects Pricing Strategy

• by Darwin Liu , December 1, 2022

During a recession, businesses large and small experience declining sales and profits. Smaller businesses, lacking the scale of larger companies, are even more vulnerable to failure in a downturn.

There are many approaches to combating the downturn. Efforts to cut costs may include layoffs, as currently seen in the tech industry, or reductions in spending, marketing, or research. This article covers how ecommerce brands can increase profits during a recession with two major strategies.

Value-based pricing. When companies base their pricing on how much the customer believes a product is worth, rather than according to the cost of the product or historical prices, they can increase profitability without impacting sales volumes very much.

The marketer's job is to determine how much demand there is for the product and what customers are willing to pay for it. This will help the marketer determine what price to charge customers and how much profit they can make on each sale.

While pricing value is not an exact science, there are a few techniques. Many factors go into determining the value of a product, including what competitors are charging, the market demand for that product, how well-established the business is, and whether or not the product is new or still in its infancy stage.

While some e-tailers can be hesitant to implement a value-based pricing strategy, they should remember that most consumers expect prices to increase, as many retailers are increasing prices with success.

Additionally, many consumers are new purchasers, and plenty of repeat purchasers may not remember old prices anyway.

Competitor pricing. It is now more crucial than ever for companies to price items relative to the competition, because platforms like Google shopping make price comparison extremely easy. This strategy becomes more common once a product has been on the market for a long time or there are many substitutes for the product.

First, e-tailers need to gather data on competitor pricing. Many brands use a custom script or a third-party tool to scrape pricing.

Then, businesses have three options when setting the price for a good or service.

Firms setting prices above competitors' position the item as a premium and need to create an environment that warrants the premium, such as payment plans or additional features. E-tailers can also win customers with a price slightly below the market average. Lastly, a business can choose to charge the same price as its competitors, but differentiate itself through marketing.

Best Pricing Strategy Mix For You

Most e-tailers need value-based and competitive pricing strategies working cohesively to weather the economic storm ahead. That said, certain products lend themselves well to one strategy or the other.

Distinctive and valuable products are best-positioned to take advantage of the value-pricing model. Competitive pricing works very well for commoditized items or simple products with few variations, such as books. It also works well for items that do not require unique shipping options, such as apparel and accessories.