Apr 03, 2020

Should You Cut Prices During the Next Recession?

Recessions happen periodically as the stock market and economy move through different cycles. One side effect of a recession that can directly affect your business’s financial health is a pullback on spending among consumers. Reducing prices might seem like an obvious way to encourage your customers to spend more money, but is it the right call? If you’re working on creating a plan to recession-proof your business, here’s a look at both sides of the price-slashing equation.  

Potential Benefits of Cutting Prices

When a recession happens, it can directly affect how much money consumers are earning and what they spend. For example, they may become choosier with their purchases to make their dollars stretch as far as possible. That could mean cutting out nonessentials and focusing on basic needs only, such as food, housing, and transportation. 

If your business doesn’t fall under the basic needs umbrella, then reducing prices could act as an incentive to get consumers to spend. For example, say you run a landscaping and lawn care business. A recession hits and you start getting fewer calls from customers because they’re opting to cut their grass themselves. You could offer a special promotional discount to lure them back to use your services. 

Cutting prices in this way would keep cash flowing into your business. That cash would allow you to meet your operating expenses and stay afloat financially while you wait for a recession to reverse. If you’re willing to expand that discount to new customers as well, this could also be a way to increase your client base. 

Downsides of Lowering Prices in a Recession

While cutting prices could help your business in the near-term, it’s important to consider how it might affect your business in the long-term once a recession ends. 

For one thing, your customers may be expecting prices to remain low once a recession ends. If you decide to reset prices to their original levels or even raise them to offset reduced profits, that move could be risky for your business. Your customers might end up switching sides and going over to the competition instead. 

Even if customers stay put, lowering prices can impact your business’s profitability and financial health for years after a recession ends. For instance, you may have less profit margin to make investments in your business’s growth. If you can’t grow and expand at the pace you want, you may be left behind by competitors who have the cash flow to do so. 

Slashing prices can also send the wrong signal in general. It may make your business look like it’s desperate to keep a foothold in the marketplace, which could turn some customers off. Cutting prices could end up being a self-fulfilling prophecy if it has the opposite effect, leading customers to take their business elsewhere instead of bringing it to you. 

What to Do Instead to Recession-Proof Your Business

If you’re worried about how a recession might impact your business, there are things you can do to prepare. These tips can help you promote financial stability so that whether or not to cut prices isn’t even a question when the next recession rolls around. 

 

A recession isn’t ideal, but it doesn’t have to spell disaster either. With the right planning, you can weather a downturn successfully without having to sacrifice prices or profits. 

About the author

Rebecca Lake
Rebecca Lake
Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.

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