Yesterday, on NPR’s Diane Rehm show, several economists discussed inflation and deflation and their impact on economic growth. They agreed that slight levels of inflation, somewhere in the vicinity of 2% per year, promotes economic growth. Deflation, falling prices, encourages buyers to postpone purchases in hope of being able to get an even lower price tomorrow. By postponing their purchases, buyers slow economic growth.
What implications do these insights have for your company’s pricing strategies? First, your price must must be slightly lower than the value your customer is getting. Customers aren’t going to part with their dollars unless they value what they’re getting more than the dollar they possess. My experience in working with clients is that they give their customers much more value than is needed to get customers to part with their cash.
Second, if you’re consistent in your pricing and you continue to improve your offerings in ways that customers value, they’ll continue to make purchases when the need or desire strikes them. This reality affords a couple of advantages. It makes their buying habits more predictable which, in turn, makes your production scheduling more efficient and more profitable.
Conversely, if you’re constantly offering ‘special deals,’ whether they take the form of discounts, loyalty rewards or sales, you encourage customers to postpone purchases in anticipation of lower prices in the future. In the process you’re slowing demand for your offerings or at least shifting that demand to those times when you’re offering special deals.
When presented with a special deal, customers will hoard. They’ll buy the quantity they think they’ll need to tide them over until the next sale. This disrupts their normal buying habits and places heavy demands on your production capacity during, or just prior to, the announcement of your sale.
These are just a couple of the problems that low-price and discount strategies pose. For more insights into the economic impact of low-price strategies order your copy of my white paper, Low-price strategies subvert economic growth and employment.