July 14

[Nugget #21] Pricing in Times of Crisis (part 2): Manage Financial Anxiety With Cash Flow Management

First driver of price consciousness during recessions: Anxiety about financial future

We discovered three reasons why customers become more price conscious during economic downturns in the previous pricing nugget. One reason is your customer's anxiety about her/ his financial future. To gain back a sense of control dealing with uncertain times, customers save money precautionarily, just in case.

Pricing tactics borrowed from "cash flow management"

Now imagine you are the sales manager for a consumer products company. Your products come at relatively high price points that make customers think about what it would mean to their financial situation if they bought them.

Researchers and practitioners recommend various means to reduce customers' financial fear. Before we turn to those recommendations and reflect on how companies apply them today, I would like to offer a mental model first that might guide your thinking. Assuming that customers are conscious about their "cash position" to buffer adverse situations or "negative cash flows" in the future. This analogy to (corporate) cash flow management has three implications.

  • First, people might favor predictable (negative) cash flows over unpredictable.
  • Second, customers might prefer matching negative cash flows to positive cash flows. Matching cash flows means income payments should cover payments for a product should so that the cash position, the buffer, remains untouched.
  • Third, consumers prefer lower negative cash flows over higher negative cash flows (which is complicated accounting language for lower prices are better than higher ones).

What good can companies do to relieve their customers' financial anxiety?

Make cash flows predictable: When customers buy a product, they know the price (even when paid via a financing option and respective installments). However, if the product fails to deliver or breaks down, customers might incur unexpected payments to replace the product. To mitigate this risk, companies could extend warranty periods.1,2 For example, because of the Corona crisis, retailers expanded product return periods by more than the duration of store closures.3

Smooth negative cash flows: Assuming that most customers receive their income - such as salary - monthly, sellers could offer financing options to match payments for products or services with monthly income cash flows.4 Responding to Covid-19, carmakers offer more convenient financing options for new car buyers.5

Lower negative cash flows: Lower demand during recessions might tempt companies to cut prices directly. However, giving discounts "in-kind", such as "Pay for 2, Get 3", leaves your customer and your company better off: you maintain your standard price level, and the discount has a higher value for your customer than what it costs you (you still keep the margin).6 For example, hotels introduced such promotions during the Corona pandemic ("pay for one night, get the second for free").7 

Customers become more price conscious during times of economic crisis; three factors explain this new behavioral tendency. Today we looked into the first, anxiety about the financial future. In the next Pricing Nugget, we turn to pricing tactics to mitigate the second factor: "feeling guilty when spending money".

This Pricing Nugget is based on the new whitepaper "Pricing Advice in Times of Crisis". It takes the theory from the academic research summarized in the whitepaper and reflects about it in light of actual pricing tactics applied in the current crisis. 

References

  1. 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.
  2. Simon, H. (2009). The Crisis and Customer Behaviour: Eight Quick Solutions. Journal of Customer Behaviour, 8(2), 177–186.
  3. Campbel, C. (2020). 14 retailers with flexible return policies during the coronavirus pandemic. https://eu.usatoday.com/story/tech/reviewedcom/2020/04/09/14-retailers-with-flexible-return-policies-during-the-coronavirus-pandemic/5122241002/ [last accessed July 14th, 2020]
  4. Quelch, J. A., & Jocz, K. E. (2009). How to Market in a Downturn. Harvard Business Review, 87(4), 52–62.
  5. Nerad, J. R. & Wardlaw, C. (2020). Automakers Create Coronavirus Car Payment Plans & Programs in Bid to Boost Flagging Sales. https://www.jdpower.com/cars/shopping-guides/automakers-create-coronavirus-car-payment-plans [last accessed July 14th, 2020]
  6. Simon, H. (2010). Beat the Crisis: 33 Quick Solutions for Your Company. New York, NY: Springer New York.
  7. Simon, H. (2020). Emergency Pricing Against the Corona Crisis: https://www.simon-kucher.com/de/node/5368 [last accessed July 14th, 2020]

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[NEW RELEASE] Whitepaper “Pricing Advice in Times of Crisis”

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[NEW] whitepaper "Pricing Advice in Times of Crisis"

Digest of 50+ studies explains how customers' behavior change and how companies should adjust their pricing during economic downturns.