Price Cuts in a Downturn: The Cascade Nobody Plans

Revenue drops, and within weeks the same proposal is on the table as in every previous downturn: go via price. Rarely put that bluntly. Usually it arrives as an eco line, as the second line the company should finally launch, as a hybrid strategy, as private label or as a basic basket. The reasoning is always the same and it comes from first-semester economics: price elasticity of demand. We are simply too expensive.

So far, none of that is wrong. The customer offered the familiar product at 90 instead of 100 will buy. The calculation just does not end there.

Why the reflex is so strong

Price is the only lever management can pull alone and immediately. A product improvement takes quarters, a new market takes years, and every cost reduction costs internal energy. A price cut works next week and looks like decisiveness. That is what makes it so attractive in a downturn – and exactly why it is rarely treated as what it is: a strategic decision with effects over several years.

The cascade

What follows runs to a script that plays out the same way across very different industries.

Stage 1. The new customer gets 90 and buys. The effect is immediate and is read as confirmation.

Stage 2. In an age of buying networks and staff changes in procurement departments, the price does not stay hidden. Existing customers want 90 as well – with the thought that they have been paying too much for years.

Stage 3. Within months the price is close to 90 across the board, with revenue only slightly up. The quarterly report shows a small revenue gain and a collapsed gross margin. A cost reduction programme follows, often combined with relocating part of production.

Stage 4. Six months later competitors have followed, and the market price is 85. Revenue now falls as well.

Stage 5. A year on, the quality problems from the relocation come back as complaints and as warranty provisions. New suppliers meet the required quality – but not at that price. The company sits at 85 with higher costs than it had at 100.

None of these five stages is unreasonable in itself. Each follows from the one before, and in every single meeting there are good arguments for the next step. That is why the cascade is so rarely broken off: nobody decides it as a whole.

What gets overlooked

Price elasticity holds. Alongside it, however, there is a second quantity that appears in no lecture: performance inelasticity on the customer side. Customers have a reliable sense of which performance belongs to which price. For a defined performance there can only be one defined price.

That is why the middle way does not work. Anyone telling customers they get the same performance through the second line, only cheaper, is underestimating them. And anyone quietly adjusting the performance to hold the price – slightly less material here, a cheaper component there – will be noticed. In the end the customer feels deceived, and then they are not price-sensitive, they are gone.

When a second line does work

Differentiation downwards can succeed. As a rule it requires a business system of its own or a brand of its own – not the same product with a different label. And it requires costs to fall faster than the price to the end customer. If cost reductions lag behind the price decline, you are in the earnings trap, and getting out of it again is close to impossible.

What carries a company through the downturn

The way through leads via performance, not via price. Talk to your customers about what could be better in your products, and look for unsolved problems that no one has answered yet. In parallel, fixed costs have to be made flexible – but without damaging your own core competencies, because those are the difference once the downturn ends.

The test for this is uncomfortably simple: at the end of the crisis your price distance to the middle of the field should not be smaller than before, but larger – because your products have become better in the meantime.

Recommendation

Set out in writing how far sales may go on price – in the core range as much as in second lines – and treat changes to that as a management decision, not as operational latitude. Have concrete cases from recent months shown to you: which order was won at which price, and what it contributes to the contribution margin. And test every planned second line against the two conditions: its own business system or its own brand, and costs that fall faster than the price.

Whether a company has a strategy it actually lives by is not decided in the strategy document. It is decided in a recession.

Would you like to know how robust your price positioning is in a downturn? The Quick Health Check takes five minutes to complete and shows which state your company is in and which fields of action offer the greatest leverage – as a five-page profile, reviewed by an experienced consultant and free of charge. Start the Quick Health Check.

This article is based on a chapter from “Erfolgreiche Arbeit in Aufsichtsgremien”, published by 10-P Consult in 2025.

Further articles:

What Your Contribution Margins of the Last Five Years Reveal (link)

Product Range Rationalization: When an Item No Longer Pays Its Way (link)

Restructuring: Mastering the Crisis (link)