Rafi Mohammed

Prospering in a Recession: Capitalize on Trading-Up and Trading-Down Behavior

Posted on May 12th, 2009 (0 Comments)

When The Art of Pricing was published, a pricing consultant I know expressed concern that I made pricing seem “too easy.” And while creating a comprehensive pricing strategy isn’t child’s play, I firmly believe that it is straightforward to create and implement. For example, a key strategy for most companies to employ is offering good (low margin), better, and best (highest margin) options. These options allow companies to serve customers who are “trading-up” as well as those who are “trading-down.” When times are flush, consumers can trade-up to the best option and when budgets are tight, they can trade-down and remain in your product family via the more affordable “good” option.

David Kesmodel wrote an interesting Wall Street Journal article last week that highlights this trading-up/trading-down consumer behavior in the beer industry. Until recently, beer drinkers were trading-up to small craft beers, imports, and premium light beers. Now sales of these beer types are struggling as customers are focusing on being thrifty. Last year sales of premium beers like Budweiser and Miller Lite fell by 7.4% and 6.5% respectively. In contrast, sales of Busch and Miller High Life, which are considered sub-premium brands, were up 5.3% and 2.8% respectively. Highlighting the benefits of employing a good, better, and best versioning strategy, David Peacock, the U.S. President of Anheuser-Busch InBev NV, is quoted as saying “we feel we have brands that can meet every consumer need.”

That said, prospering in a recession isn’t always about offering a “good” option to those who are trading-down. In fact, there are opportunities to offer a “best” option to those looking to trade-up. I know this sounds contradictory in a recession, but work with me on this. McDonald’s continues to prosper (U.S. same store sales were up 6.1% in April) in great part because diners are trading-down to affordable fast food. I believe this represents an opportunity for the Golden Arches to offer more premium products. Diners who are trading-down from casual sit down restaurants like Chili’s and The Cheesecake Factory are apt to “reward” themselves with a premium product by reasoning that they can “treat themselves” and still save money. Jamie Hartford, a business reporter, recently pointed out to me that perhaps this consumer trading-up psychology is one reason why McDonald’s specialty coffee drinks are selling so well.

The bottom line: while at first glance this may seem counterintuitive, if your product or service is being traded-down to, customers with different needs and budgets are walking through your front door…they represent opportunities to reap healthier margins. By offering good, better, and best versions, your company is equipped to profit no matter what point of the economic boom and bust cycle we are in.

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