Profiting with the Post Recession Customer

The current recession has been longer, deeper, and generally more damaging than any other since the great depression.  As we move past the recessionary scramble to survive and into some semblance of a recovery, no intelligent executive should expect things to return to the way they were.  The world has changed.

Research into customer behavior is showing two general trends:

• Demand is not only generally lower, but also the demand that does exist is at a lower price point.
• This shift in customer demand and preferences is likely to persist for the foreseeable future.

These observations imply that a change is needed in supply:

• Corporate strategy must adapt to the new demand profile if a company is to thrive.

Easy enough logic so far, but stating that things are changing is about as meaningful as stating that the sky is blue.  How should this persistent shift in demand affect corporate strategy?  To show the effects of this statement on corporate strategy, we need to examine the demand profile, its influence on past pricing strategy, and how the changes in demand should influence the pricing strategy of a customer focused company.

The concept that demand is dispersed between those with a high willingness to pay and those with a more frugal appetite is well understood in industry, corporate, product, and pricing strategy.  This dispersion in demand often leads to what is sometimes called a versioning strategy:  products are made with varying levels of benefits and offered at varying price points.  In a typical versioning strategy, good products are sold with minimal features at a low price, while better products are sold with more features at a higher price point, leading up to the best product in the category.  (See the lower portion of New Opportunities at the Bottom.)

What is different in this post recession economy is not only the height of the demand profile, but also the position.  This in turn should influence pricing, product, and corporate strategy.

A demand profile describes the maximum willingness to pay of specific customers within a market.  In a typical market, few customers are willing to pay a very high price, most customers are willing to pay a more moderate price, and a few customers will refuse to purchase unless the priced is very low.  (Customers that refuse to pay at any price are not customers, they are freeloaders and hence do not count as customers.)  A plot of the number of customers with a specific maximum willingness to pay against price reveals the demand profile.

In this post recession economy, the overall demand expressed is lower.  Moreover, the peak in demand has shifted to a lower price point.  (See the upper portion of New Opportunities at the Bottom.)

New Opportunities at the Bottom

Recent research by Flatters and Willmott partially explains this observation.  They measured a number of specific changes in customer demands that are likely to persist for the foreseeable future.  They raise three concepts that will particularly affect corporate strategy:  a rise in the demand for simplicity, an increase in thrift, a willingness to accept good-enough solutions.

Because demand has shifted to a lower price point, albeit accepting a lower set of benefits, executives may now be in a position to seize an un-served market at the bottom.

Companies that have offered a wide variety of goods and services may find it profitable to shift their focus from “Newer” and Better” towards “Good-enough”.  Good-enough products are those which provide the minimal required functionality to deliver the minimal required utility to compete in the category and are priced at a proportionately lower point.

A recent example of companies uncovering opportunities at the bottom comes from consumer product titan P&G.  Recently, they launched Tide Basic across the southern US, an entry level formulation of Tide, selling for about 20% less.

While P&G is aware that the new Tide Basic will cannibalize some sales of regular Tide, they are also well aware that the demand for a basic laundry detergent will be filled by someone.  Rather than hand this market over to competitors and store brands, P&G has chosen to seize it.

Business markets can, and perhaps are already, execute a similar strategy.  For instance:

• Software as a Service (SaaS) is one mode of moving to “Good enough”.  In SaaS offers, it might be possible to encourage customers to forgo some customization of enterprise software in exchange for declining installation and up-front licensing fees.
• Maintenance, Repair, and Operations (MRO) suppliers can shift their portfolio to entry-level, effectively shifting their professional class products to a lower price point with minimal benefits.
• Heavy machinery manufacturers can reduce features such as automatic transmission or sensors to detect potential future faults, in exchange for lower upfront capital costs.

But beware, simply reducing features and benefits in order to lower the price point should never yield an unreliable product.  Brand value, which takes years to develop, should not be sacrificed for a quick buck.  No customer is so rich that they can afford to repeatedly purchase cheap products.

References

• Paul Flatters and Michael Willmott, “Understanding the Post-Recession Consumer,” Harvard Business Review 87, no. 7/8, (July-August 2009):  106-112.
• Ellen Byron, “Tide Turns ‘Basic’ for P&G in Slump,” The Wall Street Journal, (August 8, 2009):  A1.