In the previous Pricing Nugget, we learned consumers become more price-conscious during recessionary times because of three drivers. The first reason why consumers become more price-conscious is that they become more anxious about their financial future.
The question we want to answer today is
How can you make your customers and consumers less anxious about their financial future?
(By the way, there are more answers than the ones we look at today. But they give you a first starting point.)
Let us borrow some inspiration from corporate cash flow or liquidity management, and look at some terminology:
- Customers receive cash flows: incoming or positive cash flows (green bars).
- Then your customers make payments: outgoing or negative cash flows (red bars).
- The difference between both are net or residual cash flows (blue bars).
And similar to corporate cash flow or liquidity management, customers want to make sure that their net or residual cash flow is positive for each month. Customers want to have their blue bar to be above the line. A positive residual cash flow means customers have more cash available than before.
The residual cash flow adds to their emergency fund. The emergency fund is an available budget that "insures" your customers against the negative impact of the economic downturn on their financial situation.
This also means if the blue bar, their residual cash flow, is negative, their emergency fund shrinks in this month, and it leaves your customers more vulnerable to the economic crisis.
So customers avoid having a negative residual cash flow.
Principle #1: Make (negative) cash flows more predictable.
What happens now if the outgoing payments are not predictable?
If the outgoing, negative cash flows fluctuate. This fluctuation also reflects in their residual cash flow, and this risk rings an alert bell with your customers. Unpredictable fluctuation in payments increases the risk that the residual cash flow becomes negative and the emergency fund shrinks.
So customers prefer predictable negative cash flows over unpredictable ones because this uncertainty makes them more vulnerable to a financial crisis.
What does it mean for your pricing?
The first principle recommends making negative cash flows more predictable. Why are these cash flows not predictable? Customers know the price that they pay, but customers don't know whether the product delivers what they expect, whether it's the right product, or whether they need to buy another one as an alternative.
Customers might also be unsure whether the product that they just bought breaks down a few weeks later and they have to buy a replacement product.
You can take away these uncertainties and these unpredictable costs or negative cash flows in two ways.
You can do it before the purchase. You can offer an extended trial or return period so that customers lose these uncertainties before making the final purchase.
You can do it after the purchase, too. You could offer an extended warranty period or any other guarantee that ensures customers don't have to buy a replacement product in the foreseeable future.
Principle #2: Smooth negative cash flows.
What else can you do to help your customers avoid getting with their blue bar in red? In this example, we have a large expense in month one, exceeding the incoming positive cash flow so that the residual cash flow becomes negative.
You could take this huge negative cash flow and spread it out across multiple months so that the negative cash flow matches or becomes less than the positive cash flow.
Consumers prefer matching negative cash flows to positive ones because synchronizing the timing and the magnitude of positive and negative cash flows ensures that the residual cash flow does not become negative.
What does it mean for your pricing?
The second principle tells us smooth negative cash flows. If you have a purchase that comes with a one-time payment that is particularly large, you could take this payment and spread it across multiple periods.
You could offer more convenient financing or leasing options so that the payments for your product match the positive cash flows your customers generate, for example, salaries.
The second idea is much trickier than it sounds here. You turn from a transaction-based business model to a subscription-based business model. In this way, you turn away from prices and payments for every transaction to a flat fee for each period your customers use your product and services. This flat fee is identical, predictable, and ideally matches the positive cash flows of your customers.
Principle #3: (Intelligently) lower prices - and communicate price reductions.
What else can you do to help customers avoid their residual cash flow becoming negative? You could lower prices. The complicated accounting terminology would be consumers prefer lower negative cash flows over higher negative ones.
What does mean for your pricing?
What can you do? Instead of lowering prices directly, you could give discounts in kind, such as “buy two, get three.” Your customers still save money, and your company is better off for two reasons. First, you don't reduce your standard price level, so your customers still have your higher price level in mind and it still, it's disserved as an internal reference price so you're not diluting your brand by lowering price expectations for your customers.
Second, this kind of discount is actually more profitable compared to cutting prices. In this case, for example, cutting your prices by 33%.
When you communicate price reductions, have those customers in mind that are knowledgeable about economic topics and understand that this economic downturn is only temporal.
If you have a high-value offer and you promote it as “available now” these customers understand that this is a time-sensitive deal and this offer will disappear once the economy improves. These customers see the value of this deal and are less likely to postpone their purchase, but seize the opportunity and buy this product at this fantastic high-value offer price.
To make your customers less anxious about the financial future, we learned we should
- make negative cash flows more predictable,
- match negative cash flows to positive ones, and
- ower negative cash flows by intelligently lower prices.
References
Hampson, D. P., & McGoldrick, P. J. (2017). Antecedents of Consumer Price Consciousness in a Turbulent Economy. International Journal of Consumer Studies, 41(4), 404–414.
Quelch, J. A., & Jocz, K. E. (2009). How to Market in a Downturn. Harvard Business Review, 87(4), 52–62.
Simon, H. (2009). The Crisis and Customer Behaviour: Eight Quick Solutions. Journal of Customer Behaviour, 8(2), 177–186.
Simon, H. (2010). Beat the Crisis: 33 Quick Solutions for Your Company. New York, NY: Springer New York.
Strutton, D., & Lewin, J. (2012). Investigating Consumers' Responses to the Great Recession. Journal of Consumer Marketing, 29(5), 378–388.