Wading Through A Deluge of Recession Pricing Advice

Over the past year or so a lot of advice has come out from business thought leaders about recessionary pricing strategies. Below are three articles from what are considered to be well-regarded sources:
INSEAD: When to push the panic button?
Harvard Business School: Marketing Your Way Through a Recession
McKinsey: Pricing in an inflationary downturn
Although there's a lot of valuable advice in these perspectives, it is surprising that some of these studies propose a one-size-fits-all approach to recessionary pricing.
Sorry to burst the bubble, but the consumer decision process is not that simple. For instance the INSEAD article proposes that consumers are not more price sensitive during a recession, the extra sensitiveness shown during recessionary times is attributed to income smoothing and advices firms to focus on share of customer wallet rather than share of market. Good advice, but while it is great to focus on share of wallet, share of market ultimately determines the financial performance corporate stakeholders will be evaluated on. Share of wallet as a metric is focused on retention(up-selling and cross-selling). While retention is critical, acquisition is important too in driving growth. Market-share is a more wholesome metric that takes into account performance of both retention and acquisition activities, especially if the firm is in a growing category, where acquisition could be a greater determinant of performance than retention. On the other hand for mature industries, retention would certainly be more important. This highlights the perils of subscribing to generic strategies.
Another frequent advice I have come across is to not take a perceived increase in price sensitiveness during economic downturns as a signal to aggressive pricing strategies that may lead to unprofitable price wars. That is all good, but game theory suggests that in multi-competitor industries, you will always have a player that will try to increase their payoff by defecting and using aggressive pricing strategies to garner market shares. In this case should you take the higher road and trust in your customer loyalty or protect your market-share?
The Harvard article scores on a few points, for instance Advice #6 is to "Adjust Pricing Tactics"- some good nuggets of wisdom here, but #3 "Maintain Marketing Spending" is no all that realistic. Margin pressures inevitably result in budget cuts.
The McKinsey article actually has some pretty good advice on how research steps that can help fine tune pricing strategy, without actually trying to generalize findings. I especially liked these:
Monitor customer-level profitability
Update price sensitivity research
Monitor your industry’s microeconomics
Consumers reaction to pricing in recessions is not generic across all of their purchases. For instance, if a Brand is in a category with relatively low product differentiation, price discounting could forever forfeit brand premium, while Brands in categories with higher product differentiation can actually leverage pricing without damaging longer term equity. Also for service-based industries, brands can drive longer-term market-share by lowering price and locking in customers over a longer-period. Ultimately the key thing to remember is that when it comes to pricing strategy- one size certainly doesn't fit all.

Ghilarducci's Guaranteed Retirement Account Plan & The Macroeconomy

The last couple of weeks there's this rumor that's been floating around that the Government plans to do away with 401K and replace them with what is being called Guaranteed Retirement Account. The idea apparently originates from an economist, Teresa Ghilarducci, who put forward a paper "Guaranteed Retirement Accounts Toward retirement income security" in November 2007. A year after the paper was published, in the wake of one of the worst financial crises in the history of the US, the author was apparently called to testify before Congress as the paper caught the government's eye. The paper proposes that workers "not enrolled in an equivalent or better defined-benefit pension" be enrolled in a "GRA" plan that combines the best features of defined-benefit and defined-contribution plans, offering workers guaranteed (?) retirement benefits- contributions will earn a rate of return guaranteed by the federal government. Upon retirement these funds will convert into annuities. Ghilarducci claims that combined with Social Security, these annuities will replace 70% of pre-retirement earnings (I thought most of the folks who entered the workforce within the past decade had given up ever seeing their Social Security benefits?). Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent (but remember you are foregoing the opportunity to generate market returns on your investment- not amounting much today, which is why we are even entertaining this discussion I guess). Assuming this thing works and the Feds will be able to deliver on their promise, what will be the fallout from pulling that kind of capital out of the investment markets? Of the total $17.1 Trillion in U.S. retirement assets, mutual funds managed $2.2 Trillion, while IRAs accounted for $4.5 Trillion (data as of March 31, 2008 from Investment Company Institute). If a $0.75 Trillion bailout was going to pull us out of the financial crisis, what will be the outcome of withdrawing $6.9 Trillion out of capital markets? Or am I missing the math completely?

Credit Card Payment Systems: To Interchange or Not To Interchange!

Not too many people are aware of how the money they charge on their card at the Credit Card Machine in their favorite store makes its way to their monthly statement and who the intermediaries that are involved in this transaction trail are. In simple words, there are basically open networks like MasterCard and VISA that have different parties, like issuing banks (card issuers), merchant banks (that pay the merchant) and associations that process the transactions. Then there are closed networks like Discover and America Express that do the full-cycle from issuing cards to processing payments to paying merchants (although Amex may now be considered ‘open-loop’ since other banks like MBNA and Citibank have started issuing Amex cards). An important part of this entire transaction is the ‘interchange fee’, which is a percentage of the purchase amount that is charged by the Association (VISA/MasterCard) to push the transaction through. There is some justification in the interchange being charged; they are the costs of processing the transactions and absorbing the risk until the consumer pays for their transaction. This is why Associations like MasterCard and VISA retain part of the interchange (processing costs) and the issuing bank gets a large share of the interchange fee (risk-based costs). But nobody has really done a proper valuation on whether the fees are truly reflective of the transaction costs and risk premium involved. So in the interests of the consumers, some regulation in this area might be a welcome change. A substantial portion of the interchange goes back to the issuing bank. Issuing banks factor these into their cash-flows while evaluating credit risk from extending or increasing credit for cardholders. In the absence of this compensation, issuing banks will most probably get more restricted in extending or increasing credit since now they will have to bear the entire credit risk of the transaction until the payment comes through from the cardholder.
On the other hand, banks could pass these costs on to the cardholder in the form of increased rates and fees or lesser rewards. To quote James M. Lyon, First Vice President, Minneapolis Federal Reserve Bank, "In some of these countries, card associations have responded to declining interchange fees by generating revenue through other means that regulators may not have foreseen or desired. In Australia and Spain, for instance, where interchange fees have declined due to regulatory pressure, annual cardholder fees have increased; in Australia, interest-free periods have shortened and rewards programs have become less generous. On the other hand, in the United Kingdom, while interchange fees have fallen, both annual fees and introductory rates remain relatively low."
If issuers pass these costs on to cardholders, consumers will probably be less motivated to spend, since credit card transactions represent a very significant portion of consumer spending, which may have an adverse effect on the economy, which is very much dependent on consumer spending.