Not surprisingly, firms reacted very quickly to the financial crisis and went in to near-panic mode, discounting prices across the board without fully understanding the impact on demand or profitability. The legacy has been dramatic and in many industries recession-driven discounting has fundamentally eroded the value of the market. Consumers’ price expectations are lower and buying behaviour has changed.
- 49% of firms entered into price wars with competitors.
- More than half of business leaders admit that their firms reduced prices across the board (54%). Over half of companies sacrificed margins for sales volume (55%)
- Almost two thirds of firms (63%) implemented short-term discounting policies without fully understanding the impact on demand for their products or services.
- Almost half (48%) did so without understanding the impact on profitability.
- Only half of companies (53%) focussed on maintaining profit margins when formulating discounting strategies.
KPMG Point of View
It’s not surprising that 54% of business leaders reported price discounts across the board. When survival is the key driver, dropping price is an understandable response by the salesforce as volumes fall. This might be the right thing to do if the product or service you’re selling is price elastic, and a reduction in price will increase sales volumes. But it’s vital that these are informed decisions, with a clear understanding of the trade-off between volumes and margin. Most organisations lack that informed understanding. Indeed, the data shows that a majority struggle to understand the impact of price changes on demand, and around half struggle to understand the impact on profitability. This implies that they lack deep insights in to their customer base and the price elasticity of various customer segments.
Discounts are often driven not by an informed understanding of market dynamics but by sales force incentives. Sales forces are surprisingly frequently measured by sales volume, rather than the quality of the revenue they bring in, i.e. profitability. If a salesman is rewarded for selling more, then the easiest way to achieve that objective is to discount prices. Organisations need to look at their pricing processes and controls to ensure their pricing strategy is effectively implemented and monitored. Performance metrics should be linked to profit as well as volumes; and appropriate controls should be embedded such as target and limit prices. These should be monitored and reported, with compliance rewarded and non-adherence exposed.