The price is right after all.

An earlier article said price is seldom the main factor in purchase decisions. Oops.

Despite the apparently unshakable belief among less-sophisticated retailers that price is the first factor in consumer purchase decisions, it isn't. Or, rather, it wasn't. For years, observational analyses of purchasing behavior have found that price is the third or fourth determinant. But this recession has changed that. Price is now at the top of the decision tree for many categories of products and services.

In some cases it's the determinant in brand selection. In others it's the basis of a decision to make or forego a purchase in the category.

Our previous article, "The Price Is Wrong," was right at the time but it's wrong now. Our white paper "Good Marketing for Bad Times" (click here to download) had a section on the detrimental effect of price reductions in economic downturns. That's not true during this recession. (You still might want to download the white paper, because if you omit the two paragraphs under the subhead "Cut prices?" what's left is six pages of effective tips to help you get through this crash with your brand intact, and come out of it stronger than ever.)

This recession is different in several important ways:

  • It's global. China's stock market has lost two-thirds of its capital value. Business Week reports that layoffs or salary cuts are spreading throughout the Russian economy. The British are propping up failed banks – including the venerable Royal Bank of Scotland. And Argentina is raiding private retirement accounts to help offset government deficits.

  • It's really deep. So deep that the word "recession," once avoided in polite economic conversation, is now a very popular alternative to the nasty word that begins with "D." All three Detroit car companies will run out of cash in early 2009 without a government bailout. (If they get the proposed $25 billion bailout they probably won't go bust until the end of 2009 at their current burn rate.) The trillions thrown at the failed financial sector haven't slowed the slide a bit. At 6.5%, November's U.S. unemployment is the highest it's been for more than a decade. The Dow Jones Industrial index has fallen to just about half its October, 2007 high. And NPD Group, a leading retail consultancy, predicts a 3% decline in holiday sales this year, the first decline in memory.

  • Even the rich are hurting. In most economic meltdowns, the middle class suffers most of the pain. The government safety nets for the poor remain in place, and the rich don't seem to be impacted. The nets are still up for the poor, and the middle class is feeling most of the impact this time, too. But now, even the rich are suffering. The Wall Street Journal reports that Bentley's November sales fell 62%. Porsche is off by 50%, Mercedes is down 40% and Beemer sales have declined 20%. And it's not just cars. Tiffany's same-store sales are off 6%. What will wealthy folks' holidays be like without those little powder-blue boxes under the tree?

Price matters, but it's not everything. Price isn't everything? Sure, it matters more now than it has in decades. But other factors matter, too.

  • Price doesn't matter unless buyers actually WANT the product. An offer of 50% off a VHS recorder probably isn't going to get a lot of response now that the technology is obsolete. A vegan is unlikely to be persuaded by a coupon from a steak house. Discount tickets probably wouldn't convince many people to vacation in Des Moines. Opera tickets at a deep discount probably won't sell to good ol' boys, bikers or Wrestle Mania fans. And 40% off a crew cab dually won't move the iron off the lot after the recent gasoline panic.

  • Price doesn't matter if customers think sellers won't be around to honor warrantees. Circuit City's pre-holiday bankruptcy may prove to be really bad timing if potential buyers think it will be impossible return a defective big screen. The few car buyers who are in the market apparently have serious reservations about plunking down $30K or more for the Motown Three's cars and trucks, in part because they're not sure the companies will be there to make good on warrantee repairs. Deloitte's holiday spending forecast predicts that gift card sales will decline in both the number and average value of cards sold. Not surprising, since customers aren't sure the merchants will be in business long enough to honor the cards.

  • Price doesn't matter if it's a must-have item. The "must-have" category is a lot smaller this year than it's been in the past, but if consumers truly perceive a product or service as essential, they'll buy it. "Must-have" may mean food, electricity and a rent or mortgage payment. Or it may be a minor luxury that eases the feeling of deprivation folks may feel when they have to eliminate other non-essentials from their budgets. Some of the choices are illuminating. For example, when faced with a choice, younger age cohorts discontinue cable and keep text messaging. (That has some serious portents for TV after the recession is over.) Of course, manufacturers do better in the "must-have" category than retailers. A consumer may decide that Cocoa Puffs are an absolute necessity, but may shop around for the store with best price.

Price can be a two-edged sword. Aggressive price competition may help sales and wreck profits. And as some brands discovered after the last recession, the impact of an off-price position can be felt long years into the recovery.

During the 1990 recession Taco Bell introduced a 59¢/79¢/99¢ value menu to steal share from McDonald's. According to Advertising Age, the tactic worked. Taco Bell did nibble away at McDonald's share. But Ed Rensi, who headed McDonald's at the time, says the tactic indelibly etched the image of Taco Bell as a source of cheap food in consumers minds. According to Rensi, "Discounting as a tactic that's event-driven is one thing. Discounting as a strategy is something else. It's a very bad idea, because it cheapens your product and your brand." Rensi attributes the fact that McDonald's sales per unit are now 66% higher than Taco Bell's to the divergent strategies each followed in the 1990 recession.



  1. Anonymous says

    My friend and I were recently discussing about the prevalence of technology in our day to day lives. Reading this post makes me think back to that discussion we had, and just how inseparable from electronics we have all become.

    I don't mean this in a bad way, of course! Ethical concerns aside... I just hope that as memory gets cheaper, the possibility of transferring our memories onto a digital medium becomes a true reality. It's one of the things I really wish I could see in my lifetime.

    (Posted on Nintendo DS running [url=]R4 SDHC[/url]NDSBro)