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.
- Reduce your business’s debt load. Less debt means more money you have to pay out, which can help improve the bottom line in a recession. The more of your cash flow you can hang on to, the less likely you may be to feel the need to cut prices.
- But keep a line of credit as a backup. Establishing a business line of credit before a recession strikes can be a smart move. When you have a line of credit you can dip into to cover your operating expenses, that can reduce the pressure to lower prices.
- Focus on what makes your business unique. To stay competitive in a recessionary environment, you need to know exactly what your business brings to the table. Figure out what produces profits for your business and play to your strengths.
- Consider repackaging products and services. Instead of cutting prices for your products and services, you may consider repackaging them instead. For example, if you offered bundled products or services for a set rate, breaking them apart and selling them a la carte instead gives your customers more buying options while allowing you to maintain the same price levels.
- Minimize expenses. Keeping a tight lid on your business expenditures can save you money and decrease the need to rethink your pricing. Review your business budget to see what you could reduce or do without altogether to cut down on what’s going out each month.
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.