This is a tough time for most business. Many companies are losing a lot of customers and having trouble meeting revenue commitments outlined in their 2009 budgets, which are usually created in the previous fall season. This is happening, of course, because most people did not realize that the economy would fall into recession in 2009. Executive management teams are meeting in their boardrooms every single day, trying to figure out what to do to stabilize customer retention. Chances are good that two prevailing schools of thought are being bandied about:
School Of Thought #1: Since we are currently losing customers very quickly, we need to make up for that shortfall by reducing costs (which has probably already been done), while at the same time increasing our prices in order to achieve more revenue per customer. If we have lost 10% of our customers, and raise our prices 10%, we could probably close the revenue gap.
School Of Thought #2: We’ve lost several customers during the first half of the year, and we need to focus on keeping those customers while obtaining a few new ones. Along with reducing our costs (which has probably already been done) we need to reduce our prices, providing an incentive for current customers to stay with us and encouraging prospects to become customers.
As a marketer and ardent capitalist, I believe in School Of Thought #2. It looks at the marketplace as a non-finite tub of potential revenue, even during recessionary times. It also views an increase in price as a form of taxation on current customers, which is a bad idea during good economic times and an even worse idea now. I’ve seen many struggling companies adopt School Of Thought #1, only to see them descend into a business death sprial. As customers balk at higher prices and bail out, this leaves an even smaller customer base to provide the revenue stream necessary to maintain operations. The cycle of higher prices and fewer customers seals a company’s fate and failure becomes inevitable.
From a marketing perspective, it’s an even tougher sell. We’re always looking for unique selling propositions (USPs) and differentiators, and I’ve found that raising prices kills off great marketing each and every time. It poisons the fragile relationship with the customer, leaving them bitter and resentful. Another aspect to consider is the fact that, nowadays, customers don’t go away quietly. They use social networking and forums to voice their displeasure, and most of the time it ain’t pretty.
Before you pull the pricing lever, be sure you’ve fully analyzed your pricing model and exhausted other options. After all, if you make the wrong decision, it may be you that ends up paying the price.