Don't rush to cut prices.
Dunkin Brands Chairman Jon Luther thinks that consumers will be tightfisted for lunch longer than in a typical recession, but that's good news for value-priced coffee.
Yes, everyone would like to pay less, especially in a recession, but the dangers of price chopping are greater than you may realize. McKinsey research finds that in a typical S&P 1500 company, a price cut of 5% would have to generate increased sales volume of 19% in order to pay for itself - and that almost never happens. The implication is that while holding prices steady may cause sales to decline somewhat, that course may nonetheless be wiser.
It all depends on the pricing dynamics in your business, which may be changing rapidly in this recession. For example, gasoline at $4 a gallon caused many U.S. consumers to cut back drastically on discretionary purchases; since gas today is below $2, some consumers may have more available income - but may also be more worried about their jobs. Now is the time to study price sensitivity in your markets much more closely than before.
Last updated January 08 2009: 9:17 AM ET
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