12 Jul Pricing through the pandemic
Building new pricing discipline, flexibility, and capabilities now can create long-term competitive advantages.
In many industries, radical shifts in costs, demand, and supply availability have snarled previously predictable market pricing mechanisms. The most effective companies are adapting to their customers’ immediate and changing needs while they consider longer-term implications.
Based on our research and experience from past economic crises, the most resilient companies put in place practices during the downturn that prepare them to succeed when the recovery comes. While these lessons are clear, they don’t take into account the unprecedented nature of the current public-health crisis, which is a complicating factor that needs to be considered.
Pricing is a crucial part of an organization’s rapid revenue recovery strategy. For pricing leaders, the three most important areas to focus on are: being creative in meeting customer needs while preserving value, driving strong pricing discipline, and investing boldly in capabilities for the future.
1. Be creative in meeting customer needs
Forward-thinking companies find more creative ways to meet customer needs than simply dropping the price. They preserve value while remaining flexible, and build long-term customer loyalty as a result of short-term concessions and exceptions due to COVID-19. Key actions include:
Adjusting terms and conditions.
Flexible terms can make customers more willing to make purchases. For example, a few weeks into the coronavirus outbreak, several manufacturers with healthy balance sheets extended their customers’ payment terms to help them manage cash flow. Companies in many industries can find opportunities like these—including: adding terms to provide protection from volatile costs, reducing behaviors that raise costs or recoup the costs of those behaviors, or improving payment flows. For example, many companies are lowering cost to serve by reducing delivery speed or frequency, or by fulfilling orders through alternate channels.
Providing temporary offers.
How companies adjust prices and communicate the changes to customers can impact near-term performance and the prospects for a strong recovery. Many companies reflexively slash list prices in a downturn, for example, but flexing discounts while holding list prices constant is often better at stimulating demand. Temporary discounts or promotions can safeguard the perceived value of a company’s products and services and may be less likely to stimulate price wars, putting the company in a stronger position when the market recovers. Instead of explicitly raising prices as the recovery takes hold, which may spark customer objections and competitive responses, a company can simply reduce discounts or end promotions.
During the last downturn, for example, some professional-services firms were not disciplined when providing discounts on their hourly billing. On some contracts, they set a “fixed rate” on all matters, with no reopener. Nearly a decade later, many of these contracts were still in place, while overall market rates had accelerated rapidly.
Aligning payments with customers’ business situations.
Many companies restructure payments during a downturn to help address specific customer pain points, by helping them preserve cash through deferred payments, for example. Some move to recurring-revenue or subscription models, or lower up-front fees to reduce customers’ near-term outflows. Some commercial real estate companies, for example, are currently offering to base at least part of rents on a share of sales to ease the burden on tenants. During past downturns, many customers asked service firms for fixed- or capped-fee arrangements, which provide greater cost certainty. Others sought agreements based partly on performance or outcomes rather than time and materials. Some of the most successful outsourcing firms met customer needs by backloading or amortizing transition-associated fees over the life of the agreement rather than billing as expenses were incurred.
Adjusting products or services to meet changing needs.
Many businesses adopt defensive postures during a slowdown, focusing almost exclusively on their existing customers and therefore miss opportunities as other companies double down on their pursuit of new business. The most effective companies evaluate customer preferences and buying patterns to understand how each customer segment will be affected by the downturn, choose prospects more efficiently, and tailor messages and prices accordingly. This can help them to tailor a new offering for new customers. For example, a seller of premium office furniture, which pivoted to the home-office furniture market, now offers a 30 percent discount on work-from-home solutions, free shipping, no-contact delivery, and an “ergonomic consultation” with each purchase.
In other circumstances, it can help to make unbundled or “skinny” offers that give price-sensitive customers only what they truly need. Where research reveals that a customer does not value an additional service, the company can eliminate it or shift to a lower-cost approach, helping sales teams focus more keenly on what customers value most. One form of unbundling is to offer digital or self-service options at lower prices for targeted customer segments. During the current crisis, in fact, customers’ preference for digital sales interactions has more than doubled.