Marketing in a Recession: Why Discounting Isn’t the Answer When the Economy Declines

Everyone pinches the pennies when times are tough. People start earning less, putting a direct strain on consumer spending.

And no business is safe – retail sales decline during a recession, affecting durable goods the most. The impact can be detrimental to a business’ growth plans as wage increases are cut, people may be laid off and budgets slashed.

This may frighten your business into reducing the cost to the consumer to increase the attractiveness of your offer, because after all, you need the sales, right? Unfortunately, discounting your products or services to sustain sales may be detrimental in the long run. US brand JC Penney suffered the consequences of removing offers, promotions and incentives instead of lower prices, but as we explore the harm that lowering your prices can bring, we will expand more on why they went wrong.

Here’s why you’ll do more harm than good to your marketing efforts by discounting:

You could be inputting the same time and resource, with less return potential by discounting as you’ll see lower profits from the same level of sales. Therefore, your marketing budget will feel the pinch as much as everyone else. In a recession it’s more important than ever to ensure you’re optimising your marketing budget as efficiently as possible.

Customer Acquisition Cost (CAC) may stay level – if not increase. CAC is simply the sales and marketing costs incurred to acquire a new customer. When discounting you will need to account for this in your calculations, so a blanket X per cent off could really have a negative impact here.

It’s a tale as old as time. Price and quality have been intertwined since currency existed. It’s said that the higher the price, the higher the perceived quality, and a higher value is put onto the consumer’s monetary sacrifice.

When you discount prices in a recession, you disrupt your original sales pattern by rocking your product’s perceived quality and value. During tough times, people may still indulge in higher priced goods if their satisfaction and perception of value is high.

Brand equity is about consumer perception. It’s the value a business gains from its brand recognition. For example, a branded good holds higher brand equity than supermarket own-brand goods, meaning they’re often seen as better quality. Thus, they can command higher prices because of the perceived cost-benefit. You damage this by regularly lowering your prices.

It’s also no surprise that loyalty is synonymous with higher brand equity. Discounted products don’t tend to keep a larger, loyal customer base.

When they removed all offers, promotions and incentives, JC Penney wanted to capture the marketing genius of Apple, a brand known for their loyal customer base and high prices. What they got wrong was misunderstanding the sheer commitment and excitement the Apple customer base had in buying new products at Apple stores.

Unfortunately, JC Penney does not have the brand equity of the famous inventor of the iPhone, so their strategy ultimately failed.

Reference: https://www.investopedia.com/terms/b/brandequity.asp

Once you lower your prices, it’ll be difficult to reset when consumer spending increases. Or, at any other time. Your customers won’t automatically accept higher pricing again.

They’ve seen a wide selection of goods and services increase, so simply raising prices again to make up for lost revenue or meeting inflation won’t float. Unlike pricing, quality perception can’t be changed swiftly, so switching back to regular prices won’t do anything for your sales, revenue, or brand equity.

When you drop your prices, you get in the same league as companies who compete on price alone. Are you willing to take part in that race to the bottom? According to Porter’s Generic Strategies, you may end up alienating your existing customer base as a result. Shifting your focus onto costs creates a narrow scope which niches down your target. By paving a path that leads to lower prices, you’re choosing to ignore the customers who value you because of other aspects that your brand encompasses and stands for.

Are you still wondering if reducing your prices is a strategy you’re ready to give a go? It’s bad news I’m afraid. Just as in our point about being unable to make a 180 to these prices, companies also find it hard to bounce back completely. To ode our example of JC Penney, they never saw astounding sales again. Not like they had before the pricing strategy implementation, anyway.

Instead, what you can do to promote your business in a way that boosts sales efficiency is:

Giving your customers value doesn’t mean you have to spend more. A blanket discount on all products and services is in fact quite costly. Squeezing your profit margin across the board does more harm in the long run as you look elsewhere in your business to cut costs. Adding simple incentives, offers and gifts gives the consumer a lot without affecting the gross profit you see.

We’ve just mentioned how brands can turn to other incentives aside from discounting their products. The added benefit of this is helping you stand out from the crowd. In times of recession, people choose where they spend their money more wisely. And many companies will choose to discount to increase sales, which leads to this: consumers will become blind to discounting and will perceive anything different as outside the norm.

Being relatable as a business breeds loyalty. Giving back to the community, being ethically conscious and simply empathising with what people are going through speaks volumes. Ringing true to what your customers want to hear and aligning with values puts a higher perceived value on you as a business, that trickles down to how your products are positioned.

For example, you need to reduce their efforts to solve their problems. Your mind might jump to reducing your prices, but we’ve seen that this doesn’t necessarily work well.

Take LEGO Group. Globally, they want to phase out single-use plastic packaging from all their sets. All packaging is targeted to become plastic-free by 2025. They’ve partnered with the Forest Steward Council to ensure this target is met. This resonates with their customers and the wider community interested in climate change and world health. They’ve pledged that their revenues will be plunged into finding new ways to help the planet, with the view that everyone who supports Lego will also contribute to the cause.

If you are looking for an impactful promotion that delivers ROI and can protect and yield long-term brand results, we have a wealth of experience. Contact us today to find out how a partnership with Benamic could be the investment that really gives you the competitive edge.