When is it Safe for a Temporary Distress Price?
Femi Oladele is an Educator and Consultant with solid background…
You would recall the article on product/service pricing and I hope it is helpful for you in determining the best price for your products/services. It is possible that after determining an appropriate price, you are unable to sell at that price because of the environment, economic situation, demography, social class, user/buyer preference amongst other reasons. However, the focus of this article is how and when to set a Temporary Distress Price (TDP), when the situation calls for it.
What is a Temporary Distress Price (TDP)?
This is a price below a product’s/service’s target selling price. Target selling price is the determined consumer’s uptake value of a product/service. This distress pricing is a decision to temporarily cut down the target selling price of a product/service to enhance liquidity, keep a significant customer segment and/or meet other urgent business need.
When should you contemplate setting a TDP?
I have seen stores sell products at a slightly lower price than the target selling price due to such products nearing their expiry dates. Others quickly run “promos” to sell off the products before expiry. This is a distressed sale not a temporary distress pricing scenario.
TDP is triggered when:
- A business is (almost) suffering liquidity shortages but has (excess) inventory. The scenario is such that products are available to be sold but are unsold probably due to the current economic situation.
- A business unit is not doing well but has inventory that satisfies a significant customer segment which the overall business cannot afford to lose. For example, a business unit is running at a loss and there is a decision to discontinue (shut down) the unit, however, it is noted/realised that the segment catalyses revenue for other business units. Management may decide to apply a temporary distress price to keep customers coming for other units before a better decision is taken. More specifically, imagine a business with a Gym (Fitness centre), Laundry, and Salon. If the Laundry is not doing so well, but feeds the Gym and Salon with significant customers, management may decide to use a temporary distress price for the services of the Laundry. It should be noted that this decision is a temporary one.
How to fix a temporary distress price?
First, businesses must decide if they are a price taker or a price setter. A price taker has little or no control to determine product/service price due to market conditions, regulations etc., while a price setter has significant capacity to set price due to market coverage, capacity, leverage etc.
In (highly) regulated markets, it is almost impossible to set a temporary distress price, hence the focus is on unregulated markets, where businesses can set prices reasonably.
As a price taker, the preferred choice is to set a temporary distress price that helps to at least maintain a break-even point (no profit, no loss) or a positive contribution (where selling price is higher than variable cost).
For price setters, they can flex their muscles based on shocks from other business units and set a temporary distress price arbitrarily. There is no specific (scientific) method for setting a temporary distress price.
Qualitative considerations when setting a Temporary Distress Price
- Customer perception: Customer perception changes rapidly such that a significant customer base may request (subtly threaten) that the temporary distress price should be sustained else, they go to the nearest competitor.
- Timeframe: Business owners/managers should set appropriate timelines for this distress price and clearly communicate such with market actors. The communications unit of business should take note to understand how to convey such messages in ways that will not undermine the market share or goodwill of the business.
- Employee perception: Due to reduced pricing, casual labourers, especially, may begin to expect pay cuts, which can have significant impact on their morale. It is expected that the communications unit notify employees ahead including potential impact to prepare their minds.
- Quality rating: Some customers may assume that a reduced price equals reduction in quality. Businesses will need to strongly assert that their products/services are of the same quality without sounding/appearing overbearing.
- Accounting system: Unlike discounts that is well catered to in most accounting systems, TDP may not have been captured. Business managers and owners may like to consider the cost (if any) of configuring their systems to capture the TDP decision especially if it is agreed not to be treated as a discount.
How should you respond when your competitor sets a Temporary Distress Price?
It is understandable that not all business will need to set a temporary distress price, however business owners and managers should note that a temporary distress price set by a competitor is a slightly higher potential competition for their product. If a competitor sets a temporary distress price that rivals your product’s/service’s price, then your sales might drop, you might also lose significant customers and market share.
How then should businesses that may suffer the impact of this distress price respond to a competitor’s?
First, be prepared for a price slide. The encouraging thing is that, if it is a TDP, it is only for a short time. If the price reduction continues for a long period, then it is most likely not it.
Secondly, increase your market communication output. While doing this, it will be unethical to play dirty especially in online spaces.
Finally, look for ways to improve production processes to reduce price, maintain or increase quality and provide excellent customer service.
Businesses may suffer setbacks for a while, but if it does not lead to death, business owners and managers can strive, thrive, and survive.