Small Biz: How to Price in a Retail Recession


With everyone drawing up budgets and cutting back, businesses are doing everything they can to get people to open their wallets a crack. Men's Wearhouse (Stock Quote: MW) is touting until Jan. 25: Buy a designer suit and get a second one free. Design Within Reach (Stock Quote: DWRI) is promising free shipping on everything until Feb. 3. Home Depot (Stock Quote: HD) is offering to install carpets of any kind for any size room for just $139.

Talk about a buyer's market. But before you slash your prices to keep your business afloat during these tough times, here are seven things to keep in mind:

The ABCs of pricing: When it comes to pricing, you have to understand the four Cs: what's your competition doing, who is your customer, how much does it cost to make your product or offer your service and what is customary in your industry?

"Before this recession, Americans were price insensitive, and now, they are very sensitive," says Sarah Maxwell, author of The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing. "It's pushed people to reduce and offer sales. The biggest problem I see over and over is people think they will make it up in quantity. It doesn't work. If you give a 10% cut, it will take a huge amount to make it up. And furthermore, if you don't have the demand there, reducing the price will not increase demand."

Be the trendsetter: Try to set the "reference price," says Maxwell, who is also co-director of the Fordham University Pricing Center. A client has an idea in her head of how much something should cost. It could be based on her past experience. It could be based on your competition. "If your price is more than what they expect, they'll think it's expensive. If it's less, then it's cheap. You must make certain that you are establishing the reference point."

Consider bundling: Move your inventory by selling it with another product that has a better brand name. Link the sale with another product you want to get rid of. Tack on free support or maintenance for up to a year. Offer customers a free trial. By pairing your product or service with something extra, you have a better chance of getting that sale without sacrificing profit.

Know your value: Talk up your product or service and how it differs from the competition. "Often times, people don't know about the product," says Phil Baker, author of From Concept to Consumer: How to Turn Ideas into Money. "If it truly has some advantages over the competition, don't shortchange it by under-pricing it. If they have a good reason, people will pay more."

Go green: Even in these economic times, being eco-friendly or socially conscientious can still be a draw. So if you have a giveback program, donate a portion of the proceeds to charity or if you have made packaging more recyclable, highlight it. "People want to feel good about the company they're buying from," says Baker, who is also a product development and marketing consultant.

Revamp your model: Maybe it's time to be more creative. Tien Tzuo, founder and CEO of Zuora, an on-demand subscription billing and payment service, believes that many companies would be well-served using a subscription-based business model. Just look at Starbucks' Gold Membership (Stock Quote: SBUX) card: Pay $25 a year and receive 10% off your coffee as well as notice of other offers and discounts.

"I am more prone to go to Starbucks instead of McDonald's (Stock Quote: MCD) because I will get 10% off and have already opted into the program," explains Tzuo. "These are strategies for keeping your customer base and sometimes increasing it, collecting cash up front and smoothing out your revenue line."

So a local restaurant, for example, can offer frequent customers the option of spending $20 a month and in return getting perks like a free dessert whenever they come for a meal, a promise of a table within 30 minutes of dropping by or 10% off the entire bill.

"If you can acquire 100 regular customers, that would be fantastic," says Tzuo. "It's more predictable so as a business owner, you can size how you want to expand your business because you have a known revenue. Whereas advertising, one month it's up, one month it's down. It's hard to build a business and get visibility about how you'll be six months out."

Be flexible: When it comes to financing, that is. Clients may be more willing to do business if they can pay for it over time or can put money down in installments toward purchase. For example, Sears (Stock Quote: SHLD), which last offered a layaway plan in 1989, brought the program back for the holidays. Another option: Offer customers discounts if they pay in cash. "Anything to get the money up front," says Maxwell.

Sales as a last resort: Cutting your prices may be the easiest and fastest way to see an uptick in sales, but it won't last. In fact, it can be more harmful down the road as customers come to expect your products at steep discounts. "A big mistake is thinking that it will solve the problem," says Baker. "The other mistake is you are underestimating the customer and that the only reason they are buying is price. If you have a story to tell and there is something special about the product, don't sell yourself short."

If you must go down in price, make sure your clients know it's a temporary thing, that it's a special occasion. Once you whittle away at your margins, you may not be able to recover.



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