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What pricing and selling should (not) do in the Corona crisis

The Corona virus is leaving the world in a state of emergency. In such a state, we can observe, once more, that people are far from acting rational.

The new Coronavirus is leaving the world in a state of emergency. Stock prices are collapsing around the globe, which, once again, demonstrates that the stock market reflects uncertainty and fear rather than the economic fundamentals of the stock-listed companies. Panic buying sweeps the shelves of supermarkets – although there is no shortage of toilet paper on the horizon. All of this can be seen as a showcase of behavioral economics in action.

Although we cannot predict, as of yet, how customer behavior changes, in the long run, we should at least avoid some mistakes that have all too often been applied in economic crises:

#1 Avoid price cuts and rebates: they do not address the actual purchase barriers. It is not some thousand euros more or less that keeps us from buying, but the general uncertainty whether or not we can afford to buy and own new things. Besides, price cuts are hard to take back. The automotive industry, for example, still suffers from having granted extensive rebates to customers in 2008/2009.

#2 Think twice before giving customers something for free: For example, giving free data volume to mobile telco customers seems like a good idea, as it increases value-for-money. However, people now spend most of their time at home these days will hardly be able to use up that data volume. And the feeling of not using something that we somehow pay for is what no customer appreciates.

#3 Don’t necessarily skip price increases: If you have subscription customers, you might be tempted to skip price planned price increases. There are several reasons why you should not. One is that customers have very poor price knowledge and will barely notice a left-out price increase. A second is that price acceptance is like a muscle that must regularly be trained – even in times of crisis.

Instead, we should think about how to enable customers to make choices, justify expenses and use products even if they cannot afford to buy them. For example:

#1 Address the relevant purchase barriers: Today, no customer will be more likely to book a hotel vacation when you offer a discount. But if you tell him that, if he books now, he has a bigger choice of hotels, and combine this with generous cancellation terms, chances of bookings will be higher.

#2 Talk about investments instead of costs: naturally, customers will be more cost-aware during a crisis. It will be key to develop sales stories that convince your customers that your product is still a reasonable investment. Vorwerk Thermomix is a good role model for such a strategy: although relatively expensive, it sold very well in Portugal in the crisis some years ago – why? Because the company managed to position it as a reasonable alternative to eating out in a restaurant.

#3 Rethink your price model: in a crisis, customers might avoid out-of-pocket expenses, but they still might need and be willing to use your product. In such a situation, alternative price models – e.g. leasing, rental, or subscription – can be viable alternatives. For instance, Sixt is starting to heavily promote their long term car rental as an alternative to buying a car.

We cannot predict how customer behavior will change in and after the crises. But we should be prepared that it does, we should observe how it does, and we can play an active role in establishing new customer habits. This can even be a chance for new business models to grow.

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Vocatus AG Preisstrategie Behavioral Economics
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