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Pricing and the fair deal

Updated Friday, 3rd July 2009

As we all like a fair deal, John Gaynard looks at pricing during a recession.

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Prices for many everyday goods such as clothing and groceries have dropped radically, in real terms, over the past 20 years. Globalisation and more open trade have led to efficient commodity and product sourcing. The effect of this has been multiplied by improved logistics and comparatively cheap fuel for moving ships and goods around the world and within countries.

The proportion of unskilled jobs has dropped in Europe and the number of 'knowledge workers' with higher salaries has increased. New hotels and flights to foreign destinations have opened up to supply the demand as people find themselves having to pay less for the basic necessities and more for leisure. But what was once a satisfying situation of supply and demand for businesses has now become a problem of over-supply and falling consumer discretionary spending.

In this world of over-supply and rising unemployment, it is not surprising that prices should drop. The theory of price elasticity teaches that by lowering your price you will make more sales. However there is a limit to what the market can absorb. The idea of competitive advantage contains within it the idea that any price advantage one business holds over another will eventually be whittled down to zero by competition and some businesses will then cannibalise their capital base to stay in business. Customers realise that many retailers, airlines and hotel companies have their backs to the wall and they want the feeling that they are getting a fair deal.

Price label for Shining Stars Creative commons image Icon Just_[von]Bernard under CC-BY-NC licence under Creative-Commons license

Until the middle of the 19th century in France and the advent of the department store, as described by Zola in his novel Au Bonheur des Dames, prices weren’t displayed. The norm was to bargain for everything you bought, as in the markets of many developing countries today. In the UK, it was the Quakers who introduced the idea of the fixed price as part of their rule to ensure honesty and fairness in business dealings.

"there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase"

Consumers in Western Europe and in the United States, by challenging the 'normal price' are reverting to type and doing what most other parts of the world have always done. David Roche, the President of Hotels.com said on the programme that there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase. That percentage used to be 20 per cent and it is now above 50 per cent.

So, how should businesses react to this situation, in which there is no such a thing as “the normal price” but more than half the market wants an obvious fair deal?

In some areas of purchase, prices remain fairly constant. Nobody would accept to pay £5 for a box of 100 teabags one day, and £15 for the same teabags the next day, or even £15 one day and £5 the next. They would feel that they were being diddled. Yet we accept the fact that if we buy an economy class airline ticket for Spain four months before a trip we will probably pay £50 and if we wait right up until the last minute we will pay £250 or more. The way in which airlines and hotel companies have introduced revenue management and yield management has accustomed customers to the fact that prices will vary according to the time of year they make the purchase or the date of their holiday.

But other industries cannot use yield management. They have to lower their prices but avoid the perception that they are 'conning' their clients.

Expensive restaurants will do everything to maintain the usual price in a downturn, but the restaurateur will probably offer you a free bottle of wine to go with your meal. If he maintains his prices and doesn’t throw in an obvious gesture of good will, you will feel that he is not giving you a fair deal in a time of recession. This does not apply to places where there is a lot of pass-through traffic and no attempt to keep your loyalty. On a recent trip to Budapest, I saw that many restaurants in the tourist areas were displaying price cuts of 30-40 per cent in their windows.

With regard to the luxury goods industry, even in a downturn everything is done to maintain the price, the perceived integrity of the vendor and the value of the brand. If one customer remembers proudly paying £15,000 for a watch two years ago and meets a friend who paid only £5,000 for the same watch last week, he will feel cheated and vent his wrath on the seller of the item or on his own foolishness, never to visit that shop again. The well-known luxury goods providers will do anything to avoid a drop in price and accept a decrease in sales for quite a long period in the effort to maintain their reputation and the promise of their brand.

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