Economic factors can alter companies' pricing strategies. Prices need to be flexible, especially in response to inflation and recessions. There are numerous strategies that can be employed to combat economic changes and lead to corporate sales and profits.
Pricing Based on Type of Economy
Pricing is an important part of the overall marketing mix. After a price has been established, there are ways to change the base price in response to short-term needs. There are also times when a company needs to adjust prices for economic reasons. If a firm does not react to changes in the economy, the end result could be the dissolution of the company due to decreasing profits and sales.
Farmer Joe's Market has been extremely successful over the past three years. Lately, Farmer Joe has noticed that sales are decreasing while his own costs have increased. He is concerned about both inflation and a recession. There are some ways that he can adapt to save his business.
Inflation: Cost-Oriented Tactics
Farmer Joe has a few ways to battle inflation, which is the rate at which the general level of prices for goods and services rises and purchasing power of consumers falls.
- Farmer Joe can eliminate products that have a low profit margin from his inventory. For example, he does not make much profit on his homemade breads. He has thought about offering just packaged bread from distributors as an option. But if he proceeds, he might lose customers who come to the market for his fresh breads, and it would also hurt the overall quality image of his bakery.
- Another option for battling inflation is delay quotation pricing. This is a pricing tactic where a firm does not price its product until it is finished or delivered. However, this strategy would only work for companies who have a long production time for their products. Farmer Joe's products are produced or farmed daily, so this approach will not be effective for him.
- Farmer Joe could also embrace escalator pricing, which is when the final selling price reflects cost increases that occur between the time the order is placed and the time it's delivered. The only product that would fit this pricing strategy is his homemade wedding cakes. He could explain that due to inflation, he can only provide estimates on the cakes, which range from $200 to $1,000 in cost. Based on what the ingredients cost at baking time, he would then provide a firm price.
- Companies can also keep prices constant by adding new fees to help offset inflationary concerns. Airline and phone companies both use fee charges to help with increasing costs. Any time consumers want to change a flight, there are big charges for them to pay. In addition, phone companies will charge for equipment changes, over-usage of time and to end contracts. Farmer Joe does not want to use additional fees for his customers. He's afraid of making consumers upset by stacking charges for returns, deliveries or exchanges.
Recession Pricing Tactics
Farmer Joe's other big concern is with the potential development of a recession, which is a period of reduced economic activity. If the farmer plans correctly during a recession, he can steal away customers from his competitors. One strategy he could use is called value-based pricing. The purpose of this strategy is to communicate to customers that they are receiving a great deal for their money. Farmer Joe plans to offer day-old bakery items reduced by 50% and also discounts on larger sizes of cakes, donut orders and even fruit.
Bundling products and services is one way to convince consumers they are getting a bargain.
The second way that Farmer Joe can position his market effectively in a recession is to offer bundling or unbundling of products. In bundling of products, consumers like to feel they are getting a good value by receiving extras with their purchase. For instance, hotels like to offer free dinners and in-room movies with accommodations. Farmer Joe could offer his customers a free pie or cake when they spend $40. Another avenue Farmer Joe could pursue is offering one pound of American cheese, ham and turkey for one price and calling it a Lunchbox Deal. An example of unbundling would be if Farmer Joe charged a separate amount for each part of a product or service. If you wanted to purchase his wedding cakes, he would first charge a fee for a consultation, then for a trial cake and finally for the final product.
Economic changes force many companies to alter their prices to remain competitive. There are some key economic factors such as inflation and recessions that can drastically alter sales and profits. Marketing managers can fight inflation by eliminating products with low margins, using delay quotation pricing or escalator pricing and adding new fees. During a recession, a company can use value-based pricing or create bundled or unbundled products and services. It is important to keep prices flexible and relatable to environmental changes.
After watching this lesson, you will be able to describe a number of strategies that companies can use to fight inflation and recessions.