Sales become harder with more time spent contacting and negotiating contracts. Contracts become harder to reach, and if they do happen, they happen slower, as buyers think through their decisions more thoroughly and compare alternatives. Sound familiar? This is typical buyer behavior in a recession.

At times of recession, pricing decisions are critical. It’s also important to get them right on the first try. Often there are two pricing tricks that may seem attractive to decision-makers during recessions. However, both include major risks.

Trick 1: Decrease prices

It’s easy to think that as buyers’ purchasing power decreases that lowering prices would easily drive sales. However, at a time of recession, the risk of losing more profit, when prices are lowered, is much higher.

How is this possible? Let’s think about it through an example of a jewelry company that normally sells 10,000 units of product, in this case a package of earrings, at 100€ with material costs at 50€ per product. In this jewelry company’s case, the total sales are 1 million € and profits are 100,000€ per year. In this case, the recession has caused a 10% decrease in units sold. This means that the company’s total sales decrease to 900,000€ and profitability to 50,000€, which is half of their normal profitability.

It’s a common reaction to decrease prices by 10% in hopes of recovering unit sales. However, the outcome becomes even worse, despite unit sales being recovered. Even if unit sales are recovered to the typical 10,000 units, the total sales still decrease to 900,000€ due to lower price and profitability becomes 0.

There is also always the risk that a price reduction doesn’t help recover the lost unit sales. Often during recessions, buyers simply stop shopping altogether and reduce their consumption. If both the price and unit sales decrease by 10%, the result becomes negative. The total sales are 810,000€, which means that profitability becomes –40,000€, which is a –140% decrease in profitability.

Trick 2: Decrease the unit size

Another common trick that is utilized is decreasing the product unit size. Let’s consider this with the same example in mind. In this case, the seller decides to reduce the number of pairs of earrings in the package from 4 to 3.

In this case, to supplement the 10% decrease in demand, the company decides to reduce the package size so that price and material costs can both be lowered by 10% to recover the lost demand. In this case, total sales are 900,000€ and profitability 50,000€, which is the same result as with the 10% decrease in demand. On the other hand, if this demand isn’t recovered, which is highly possible in times of recession, total sales can drop to 810,000€ and profitability to 5,000€, which is a –95% decrease in profits.

As can be seen, decreasing the unit size also comes with risks. Furthermore, this pricing calculation doesn’t even consider the reputational risks of decreasing unit size. Buyers typically view decreases in unit size as unfair, as it can be seen as a trick to try and fool the customer. This can have serious consequences for the brand image. In the case of a jeweller, customers are very likely to notice the package size decreasing from 4 to 3 pairs of earrings.

What should be done instead?

When profits decrease, something might still need to be done. Instead of decreasing price or unit size, companies should aim to decrease fixed costs or perhaps increase prices by 5% if that’s possible.

Fixed costs include all the costs that are independent of the volume of product sold. These include things like salaries, space rentals, and marketing. If these are already tight, the simplest choice can be to raise prices, which can always lead to some loss in sales. In this case, when fixed costs were reduced from 400,000€ to 350,000€, the loss in profits from decrease in demand were able to be recovered.

Similarly, if prices were increased by 5% the 10% decrease in demand only led to a 5% decrease in profitability. Businesses may feel worried about increasing prices, especially during times of recessions. However, by understanding buyer behavior, there are ways to make higher prices still look irresistible to the buyer. In addition, research has shown that people typically don’t react to small price increases of 1-5%.