Propping Up Pricing Power in Down Economy

With everyone drawing up budgets and cutting back, businesses are doing everything they can to get people to open their wallets a crack. Men's Wearhouse(MW) is touting until Jan. 25: Buy a designer suit and get a second one free. Design Within Reach(DWRI) is promising free shipping on everything until Feb. 3. Home Depot(HD) is offering to install carpets of any kind for any size room for just $139.

Talk about a buyer's market. But before you slash your prices to keep your business afloat during these tough times, here are seven things to keep in mind:

ABCs of pricing: When it comes to pricing, you have to understand the four Cs: what's your competition doing, who is your customer, how much does it cost to make your product or offer your service, and what is customary in your industry?

"Before this recession, Americans were price insensitive, and now, they are very sensitive," says Sarah Maxwell, author of "The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing" (Wiley). "It's pushed people to reduce and offer sales. The biggest problem I see over and over is people think they will make it up in quantity. It doesn't work. If you give a 10% cut, it will take a huge amount to make it up. And furthermore, if you don't have the demand there, reducing the price will not increase demand."

Be the trendsetter: Try to set the "reference price," says Maxwell, who is also co-director of the Fordham University Pricing Center. A client has an idea in her head of how much something should cost. It could be based on her past experience. It could be based on your competition. "If your price is more than what they expect, they'll think it's expensive. If it's less, then it's cheap. You must make certain that you are establishing the reference point."