Protect your pricing power
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With COVID-19, the sales department is under immense pressure to cope with the changed demand situation and find appropriate measures to react to the new normal. While it’s tempting to use price reductions as a means of compensating for a loss in sales volume, it’s also dangerous in the short and long term. Pricing managers should use appropriate measures that protect both the top-line and bottom-line to emerge from the crisis with limited damage and preserve the company’s pricing power for a future after COVID-19.
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Protect your pricing power
- 2. 5 Pricing in the crisis: winners and loosers Price gouging in the US Excessive pricing behaviour in the US: • Face masks on Amazon: $3,799 • A gallon of milk: $10 (= approx. +200%) • 36 rolls of toilet paper: $80 Promotion wars in the fashion industry Pricing measures in retail against storage and rent costs: • Voucher promotions • Heavy price reductions *A gallon is 3.78 litres.
- 3. 6 Relevant trends and influencing factors for pricing in times of COVID-19 Irrational behaviour Consumer behaviour patterns shift Shift to online channels CONSUMERS Import and export restrictions Uncertainty regarding investments Shift in capacity utilization (Hording, Catching-up) New product and service offerings Focus on cost-cutting and protection of cash flow COMPANIES Closed retail channels
- 4. 7 Not all industries are affected in the same way Increase Food and beverage Healthcare Online retail Technology Decrease Transportation Logistics Travel Non-food retail Financial goods and services Industrial goods Automotive Construction and materials Decrease Stable/slow increase 1 2 34 Volume Price 1 2 3 4 Offer Demand
- 5. Using pricing in a crisis situation is tempting but dangerous IF THE (MARKET) DEMAND DROPS IN A CRISIS SITUATION …. … BE CAREFUL WHEN TRYING TO RECOVER WITH PRICE DECREASES Supply and demand Market price Total market supply Total market demand Required extra sales volume to same margin 1 ! 1.1x 2.0x 1.1x 1.5x 3.0x 1.1x 1.3x 2.0x 10% 15% 20% -10% -15% -5% Discount Contribution margin If you are operating a 20% contribution margin and give a 5% discount, you will need to sell 33% more to achieve the same margin. -1% 8
- 6. 9 10 dos and don’ts for short-term survival and long-term success DON’T Review historical price approaches Shift to OPEX Prepare a clear price communication story Find alternative revenue streams Analyse carefully and think in scenarios Adjust prices in a differentiated way Apply smart deductions Optimise relevant short- and medium-term KPIs Find low-cost alternative and de-bundle offering Leverage your full price waterfall Focus on the short term Reaction! Focus on the medium term Rebound or reimagine? DO Make desperate moves Carry out flat price decreases Simply decrease prices Optimise (only) for profits Work on product price alone Sell the same products you used to at a discount Take advantage of the crisis Focus on CAPEX Adjust prices without explanation Focus on your existing products 1 2 3 4 5 6 7 8 9 10
- 7. 10 Ability of pricing to influence TURN- OVER CASH FLOW VAR/FIX COSTS NET PROFIT BRAND EQUITY Companies with low margin and high fixed cost. Companies with high fixed cost or high debt Highly relevant for short-term survival. Important for long-term survival Important for long-term success. Price reductions may result in stabilising/ increasing volume. Turnover and enforced payment terms may stabilise cash flow. Selective reduction of high-cost productsales may reduce cost. Pricing is always the mostinfluencing factor on net profit. Fair and consistent pricing can preserve brand equity. When it matters most During crisis After the crisis DON’T optimise (only) for profits DOoptimise relevant short- and-medium- term KPIs 1
- 8. 11 DON’Tmake desperate moves DOanalyse carefully and think in scenarios 1 3 5 7 2 4 6 Set your target What is important for your company? Turnover, cash flow, brand equity, etc. Understandprice elasticity Use data and assumptions to determine effect on volume of prices changes. Differentiate analysis of different regions, customers and product groups. Determinemeasures Select few, but effective measures. Make sure measures don’t contradict. Prepare for the new normal Think of scenarios after the crisis. Plan how to build back measures. Understandcustomers/competitors How is their business affected by the crisis? What reaction can you expect? Conductscenario analysis Create 2-3 scenarios (low/middle/high) on your assumptions. Simulate effects on turnover, profits and cash flow. Set up crisis plan and team Put together a sales crisis plan and team. Elaborate on communication guidelines. Instruct sales force. 2
- 9. 12 Customer type Product value Price elasticity Margin level Production fix cost Long-tail Key High Low Low High Low High Low High Medium Medium Medium Medium Defend price Defend volume Pricing tactics 3 DON’Tcarry out flat price decreases DOadjust prices in a differentiated way Mid-sized
- 10. 13 Hidden discounts services the customer receives forfree. Visualdiscounts volume discounts,bonuses and cash payment discount. 4 DON’Twork on product pricing alone DOleverage your full price waterfall in discounting List price Gross price Net price Pocket price The list price. The gross price The net price. The pocket price.
- 11. 14 Introduce in-kind discounts • “3 for 2“ • Extra product features • Free services or add-ons (like warranty) to avoid price drops Work with temporary discounts like • Product promotions • Limited product editions that easily revert back Steer price perception • Manage reference prices • Intensify price communication for signalling From price reductions … … to smart deductions Avoid simple, usually irreversible price reductions Use win-win types of discounts • Offer more flexible terms • Use loyalty programs • Offer money back guarantee 5 DON’Tsimply decrease prices DOapply smart deductions
- 12. 15 Value HighLow PriceHighLow Typical “Good-Better-Best” portfolio Best 30% Better 50% Good 20% Value HighLow PriceHighLow Potential de-bundling features and services: Product features, software, warranty, minimum order size, freight terms, order methods and frequency, assortment width, consulting services, installation and commissioning 6 DON’Tsell the same products you used to at a discount DOfind low-cost alternative and de-bundle offering Adjusted “Good-Better-Best” portfolio Best 20% Better 40% Good 20% Basic 20% NEW
- 13. 16 10 dos and don’ts for short-term survival and long-term success DON’T Review historical price approaches Shift to OPEX Prepare a clear price communication story Find alternative revenue streams Analyse carefully and think in scenarios Adjust prices in a differentiated way Apply smart deductions Optimise relevant short- and medium-term KPIs Find low-cost alternative and de-bundle offering Leverage your full price waterfall Focus on the short term Reaction! Focus on the medium term Rebound or reimagine? DO Make desperate moves Carry out flat price decreases Simply decrease prices Optimise (only) for profits Work on product price alone Sell the same products you used to at a discount Take advantage of the crisis Focus on CAPEX Adjust prices without explanation Focus on your existing products 1 2 3 4 5 6 7 8 9 10
- 14. OUTLOOK: WHATHAPPENSAFTER THE CRISIS? REACTION Focus on safeguarding the business and limiting the damage to the pricing power. REFLECTION Assess whether the crisis has disrupted your business model or markets. REIMAGINATION Rebuild pricing for a new normal. REBOUND Revert to previous status quo. During the crisis End of the crisis After the crisis 17
- 15. 18 Summary BE CAREFUL WITH PRICE CHANGES Use pricing only very carefully to secure deals and revenue, it may harm than help FOCUS AND STRENGTHEN YOUR SALES FORCE Focus your sales force on the important deals and make sure to win them USE A SPRINT APPROACH Monitor your measures closely and reflect on your pricing approach PROTECT YOUR PRICING POWER Deploy easily revertible measures that don’t harm your pricing power THINK AHEAD OF THE CRISIS Exercise price fairness and assess how your company has to adjust pricing