How Low Should You Go?

"Two years ago," writes Drew McLellan at his Marketing Minute blog, "we were in a tizzy over gas prices. We couldn't believe [it was] going to be $2 [a] gallon. We were outraged." Then he imagines a current scenario—with prices topping $4 a gallon—in which he asks people on the street what they would think about paying $2 a gallon for their gasoline. "They would weep for joy," he concludes. "In fact, it would sound too good to be true and they'd ask me 'what's the catch?'"

It's a prime example of just how elastic consumer price perception can be. And if you're wondering how to address pricing in a recessionary atmosphere, McLellan has these thoughts:

Elasticity is a one-way street. Customers never like paying more when the marketplace has reduced costs.

But it's also fast-acting. It doesn't take long for everyone accept the reality of higher prices.

This, however, is more true for necessities. We have to get around, so people will endure steep price hikes for gasoline; they might compensate, however, by cutting back on "unnecessary" expenditures like eating out or buying luxury items.

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