Reactive, recession-driven discounting, that wasn’t fully thought-through, cannot be sustainable. Those that think that customers will pay higher prices in better times are being highly optimistic. Once customers have been educated on a new price point, it is incredibly hard to bring that point back up.
With government cuts, public sector redundancies and increases in taxation, the economic climate will continue to have a bearing on changing buying habits. Businesses need to be aware of the pressures their customers are facing and how they are likely to respond.
Consumer confidence returning to 2006/07 levels is a long way off and focus on value is here to stay for some time to come. Within Europe, we cannot afford to ignore how badly dented confidence levels currently are in certain countries such as Ireland, Spain, Italy & Greece, which have previously been major drivers of consumer spending. That confidence is not going to return overnight. Businesses therefore find themselves squeezed at both ends; with input prices increasing and with very definite limits to how much of those increases can be passed on to the customer.
The issue here is that discounted prices are out of kilter with the fixed cost base of many organisations. Moving your price point around is a relatively straightforward thing to do. Aligning your organisational model and cost base with post-recessionary pricing is an altogether more daunting prospect. Businesses need to be willing to re-visit their cost structures and potentially make some radical decisions to ensure they are fit to compete and succeed in the new world. This might include selling off a part of their business, stopping some unprofitable activities, or implementing a different sourcing model.
What this requires is an in-depth review of markets, business models and pricing strategy. Businesses need to decide exactly which race they’re in.
In retail, for example, the lower cost ‘value’ supermarkets which have thrived by attracting increasingly price-conscious consumers, are here to stay. But they have grown up ensuring their costs are kept low, allowing them to make sustainable margins. Others need to decide if they are going to compete in this market, and if so, are their cost structures low enough to allow them to succeed? Alternatively if they are going after the low volume / premium price market, they need to understand exactly what their customers value, build a strong brand and be executionally brilliant. More so than ever before, they have to understand which market they are operating in – and how the recession has altered that market’s dynamics.