During this crisis, the last thing we need are price wars in South Florida

Huge cruise ships sadly tied up at the PortMiami or treading water outside Government Cut with no guests and nowhere to go.

Lincoln Road in Miami Beach so shuttered-up and so devoid of tourists that you almost expect twisted balls of tumbleweed to roll by.

People running, walking or biking along South Miami Avenue wearing face masks.

These are things we hoped we’d never see.

And as pressure mounts to reopen our economy, there’s something else I hope we don’t see: price wars breaking out all over South Florida.

As we reopen, the supply of most goods and services will outstrip demand for at least three reasons:

Until there’s a COVID-19 vaccine, many of us will continue to avoid crowds.

During this time of high unemployment, pay cuts, forced furloughs, battered investment portfolios and negative cash flows, we’re more likely to hoard our cash than spend it.

Tourism, the lifeblood of so many South Florida businesses, is at a global standstill.

This will lead to a dreaded business condition called, “Overcapacity,” meaning we have more goods to sell than the market wants to buy.

Businesspeople typically react to overcapacity by lowering prices in an effort to reach further into the market and stimulate demand. Discounts are the go-to tactic because they’re quick and easy to implement and most businesspeople would rather suffer temporary hits to their profit margins than a loss of market share.

But as we recover from this crisis, it’s not just a matter of making people a reasonably good offer. It’s a matter of making the deal so sweet that it’s worth risking their health for.

The problem is that even small discounts can wreak havoc on our companies’ profit margins.

For example, if a business with a contribution margin of 30% offers an average discount of 15%,

it would actually have to double sales to achieve the same dollar amount of profit.

During a consumer-demand crisis, doubling sales is a very tall order. That’s especially true if there’s a price war and everyone lowers prices hoping to stimulate demand. No one will earn back their discounts and everyone’s profits will suffer.

The likelihood, then, is that if we address our overcapacity with discounting, our profit margins will go down the drain, along with many of our hopes for an economic recovery.

So, if discounting won’t work, what will?

Capacity reductions can work. In normal times, that’s an extremely bitter pill to swallow for businesses that have invested heavily in plant, property, equipment and market share. Especially if they’ve borrowed to do so and have big obligations to their lenders.

But as we recover from COVID-19, capacity reductions will be forced on our businesses by government health regulations.

Restaurants are likely to be limited to less than 50% of their current physical capacity, with minimum guidelines for the amount of space between tables. Retail stores, hair salons, barbershops, gyms, concert venues, cultural institutions and even bowling alleys and tattoo parlors will have strict limits on the number of people they can serve at the same time and the hours they can operate.

The slow, phased approach to reopening South Florida’s economy currently favored by our government officials is good for us for two reasons. First, it’s the best way to safeguard our health and the health our families, friends, colleagues and both our “essential” and “nonessential” workers.

Second, it’s also the best way to safeguard the long-term fiscal health of our profit margins and our businesses.

So please, keep your prices where they are. Discounts won’t help. Price wars will make things even worse.