Flat-panel TVs are marked to move, and flights between the coasts have dipped below $120. Forget cell-phone billing; prepaid is in as cost-conscious consumers scramble for cheaper calling plans.
For businesses trying to coax consumers to spend, the recession has brutalized profit margins. But an even bigger worry looms: What if low prices become the norm?
A shift in Americans' attitudes about consumption and frugality could mean a loss of pricing power for businesses that persists long after the recession ends. "It's a whole lot easier for prices to come down than for them to go up," says Eric Almquist, the head of consumer global insights at Bain & Co.
- Readers vent: Stupid things people buy
Increased competition -- from online and around the globe -- is forcing companies to work harder to keep their brands relevant. And as businesses see their big-ticket items increasingly commoditized, convenience and service could assume added importance.
"The world of shopping is going to change more in the next two years than it has in the past 100," says Paco Underhill, the founder and CEO of Envirosell, a New York research and consulting company.
Consumer spending is being affected by erosion of the "wealth effect." As home values, 401(k) balances and investment portfolios decline in value, consumers are less willing to spend.
Especially dour are the baby boomers, those Americans born between 1946 and 1964 and who comprise more than a quarter of the nation's population. Boomers have been voracious consumers throughout their lives, but assets they've put aside for retirement have declined in value, making it unlikely they'll resume spending at former levels after the recession ends, says Almquist.
The recession is giving consumers greater control over prices.
More from MSN Money and BusinessWeek
Technology has changed the retail dynamic in obvious ways, especially for things like televisions and personal computers. The average price of a PC fell 14.3% in the fourth quarter of 2008, as down-market competitors like Acer challenged established companies with lower-cost netbook PCs.
Even Apple (AAPL, news, msgs), long the envy of rivals for its fat profit margins, is being forced to adjust its business model. Prices for its iMac computers and iPod media players are being pared, but sales are still falling. Sales of both iMacs and iPods dropped 16% in February, according to NPD Group, a provider of market research.
"That's an industry where, basically, people have been trained to expect prices to come down," Almquist says.
Electronics manufacturers are also squeezed on what they can charge in a downturn. Global television shipments, for instance, dropped 5% in the fourth quarter, to 57 million units, according to market-researcher Display Source. Prices for high-definition TVs are coming down even as they grab a bigger share of the overall market, demonstrating that even the most technically advanced products can become commodity items.
Brand differentiation and profit margins will revolve more tightly around intangibles. Bargain prices contributed to Amazon.com's (AMZN, news, msgs) recent financial strength, but the online retailer also benefits from stellar customer reviews.
Innovation can also help fatten profit margins. Dell (DELL, news, msgs) is pinning hopes on its new $2,000 Adamo laptop, which hits the market on Thursday. The 14.6mm-thick PC is promoted as being thinner than Apple's MacBook Air.
Still, the evidence is scant that prices in many industries will regain their former heft once the recession ends.
This article was reported by Greg T. Spielberg for BusinessWeek.
Rate this Article
High
