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Top Factors Influencing Pricing Strategy in Today’s Economy (And What to Do About Them)

After all the changes in the market in the past year—struggles with supply chain, customer demand, and inflation—many companies are struggling to manage and optimize sales, revenue and profit. Now, then, is a great time to reflect on how pricing strategy and decisions drive sales and revenue. Standard, legacy pricing no longer drives margin goals in today’s landscape. PROS Kim Watson, Director Strategic Consulting at PROS states that “Pricing is always the most important lever” when trying to resolve profitability issues. A pivot in pricing strategy, then, is the first thing businesses should consider when looking to shrink margin loss and grow revenue. But winging it or making guesses benefits no one: be methodical about it, using analytics and data, usually backed by AI.

A woman holding a tablet talking to other people in a room

But before building a new pricing strategy, let’s cover what PROS analysts are seeing in the market.

Declining Demand

In many markets, when demand declines companies will feel pressure to discount prices to try to make up for the shortfall. They may even see competitors dropping prices to compete for their own shortfalls. While this is a complicated issue, companies should try to resist the pressure to discount unnecessarily. This is the time to think about other levers to increase the value proposition to the customer to increase demand and sales, perhaps through service features that make it easier for customers to do business with them.

Supply Chain Disruptions and Inflation

Many companies struggle to apply the requisite resources to ensure the flow of goods and services in their supply chains. And nearly every industry is struggling with the effects of inflation on sales and profit. But it’s important that companies don’t allow inflation and supply chain issues to dictate or weaken their pricing strategy. Price reductions are very difficult to get back, and it wrongly puts the attention on the price rather than the service.

And price increases can turn clients away and render you not competitive.

Reevaluation of Existing Business Relationships

Due to the massive disruption to the economy, companies may take this opportunity to re-evaluate the benefits of existing supplier relationships. In the majority of B2B business based on relationships, things tend to run on inertia until something causes a disruption. This reevaluation may include drive your clients to look for other bids. Yet, studies have shown that incumbent vendors are 4-5 times more likely to win RFPs where they have existing business relationships than new vendors, even if the incumbent’s prices are somewhat higher. Because the cost of switching is so high, this is a good opportunity for you, the incumbent, to reinforce the benefits of the existing relationships. Things like trust, institutional knowledge, and organizational momentum have value to existing customers. Show customers that doing business with a new vendor will likely mean extra set up work, uncertainty around service expectations, unanticipated learning and adoption challenges, and a bucket of risks that could potentially disrupt normal business operations.

“Hardship” Price Reduction Requests

Due to the economic hardship that some of your customers will be required to bear, it’s very likely they will ask for price concessions as the health of their own business is in question. However, if not controlled carefully, lowering prices may become the new normal that is hard to undo. In some situations, it will seem to make sense to try to help struggling customers by selling to them at a reduced price. However, a better approach might be to offer to give them a “donation” of products rather than change the price number. As an example, rather than give a customer a requested 5% discount, a company can make a donation of equivalent to 5% of the cases a customer would regularly buy over a specific time period. In this way, the pricing number stays intact, and it’s easier to avoid setting a recurring expectation that might outlive the current economic crisis.

Increased Awareness of the Competition

Businesses and consumers now prefer online channels to do business. Since comparing prices becomes easier, companies will have to rely on their unique service differentiators, along with other relationship aspects, to justify newly revealed price premiums. Customers may ask for discounts to match other potential suppliers who may or may not offer similar value propositions. Sellers should monitor the prices in the market; this should be an indicator of what customers are willing to pay for your unique value proposition. It’s also important to make sure your sales and marketing messages communicate what truly sets your company apart from less expensive competition. Things like service, reliability, trust, quality, availability, selection, timeliness, support, and convenience are all considerations for relationships your customers might forego with a cheaper supplier.

Demand for a Great UX

Price is typically a secondary consideration in most purchase decisions. Other concerns like user experience rise to the top when customers make their decisions on with whom they will do business.

What is good UX? Customers want self-serve capabilities, increased personalization of the offer, access to customer service resources online, and a consistent experience across channel. So, providing these improvements to UX boost customer loyalty satisfaction and likeliness to buy—independent of price.

Check out these statistics from UX Planet:

  • Companies lose $62 billion every year due to poor customer service.
  • 70% of customers abandon purchases because of bad user experience.
  • Research shows that, on average, every $1 invested in UX brings $100 in return. That’s an ROI of a whopping 9,900%.
  • 8 in 10 customers are willing to pay more for a better user experience.

Different approaches to gaining new customers

For sure, with the changes in the economy, business from other vendors will be up for grabs. Unfortunately, many companies will use low prices as a way to try to take the business away from a competitor. This can be risky because it can sow the seeds of distrust both with the new customer and with loyal existing customers. Rather than try to entice new business with low prices, try using “fair” prices and an incentive to “try out” the new relationship. An example of this might be a monetary credit for products and services purchased in a defined time period for new prospective customers.

Technology and Systems

Pricing technology (often called price optimization and management or PO&M) supports evolving pricing strategies. PO&M advanced data science and AI can ensure your pricing is rational, consistent, and adoptable. Pricing based on appropriate segmentation and attributes ensures pricing is more likely to be accepted by both salespeople and customers. As more customers move to online channels, it will become more imperative that pricing systems generate consistent and harmonized prices across channels and time periods to avoid mistakes that can weaken customer trust. Both the timing of pricing and the price itself are important aspects of the customer experience and value proposition, as demonstrated by studies that show both willingness to pay and win rates are higher with instantaneous pricing that’s in the right range. Technology is critical to achieving both speed and accuracy.

What to do next?

Due to the effects of the global coronavirus pandemic, the world is being pushed to change. Companies are facing new challenges, but the choices they make will determine whether they come out of this crisis stronger or weaker. To successfully navigate these changes, most companies will benefit by following a few key recommendations:

  1. Resist the temptation to discount prices unnecessarily. Don’t chase competitors down the pricing spiral. Most of the time it isn’t necessary.
  2. Instead aim to make your pricing “fair” and representative of your value proposition for each segment you serve.
  3. Focus your sales and marketing efforts on highlighting what is truly unique about what you provide your customers over the competition, based on what your customers care most about. This may require additional sales training and enablement, but your online messaging might be of greater impact. With the changes in digital adoption, customers will be getting more and more of their information from self-service visits to your website and other online sources.
  4. If you feel that concessions or “investments” in your customers are required, avoid letting them erode your pricing. Instead focus on non-price ways to help your customers, even if it comes in the form of a donation.
  5. Invest in efforts to make your customer online buying experience better than what they’ve experienced through other traditional channels. Transparency, speed, and consistency will help build trust that your customers will value as a part of your value proposition.
  6. Attract new customers with trial incentives that are representative of service and value features they are unlikely to see with your competitors and without offering price concessions that undermine your value proposition.
  7. Leverage experienced and mature technology that can ensure rational and consistent pricing for each customer segment to improve your customers’ experience and solidify trust in the buying relationship.

If you want to talk to us about how to manage and pivot your pricing strategy with PO&M software you can contact us here.

PROS Smart Price Optimization and Management harmonizes dynamic prices across all go-to-market channels, while aligning with market dynamics and maximizing profitability for the company. With the help of PROS advanced AI, businesses can optimize their pricing, in accordance with customer preferences, competitive pressure, and changing market demand.

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