The COVID-19 pandemic has changed our world and the way we do business. This is a great time to reflect on how pricing decisions can help our customers, our communities, and our employees and their families. Good pricing should be something that helps everyone. As companies make good and fair pricing decisions, they earn the respect of their customers and their employees. They strengthen good business relationships. And they earn the reputation to attract new customers.
Relevant Lessons for Today’s Pricing Challenges
In over 20 years in the pricing industry, I’ve learned some key lessons that seem especially relevant today.
- Although customers prefer lower prices, price is typically a secondary consideration in most purchase decisions. Other concerns like, quality, service, selection, availability, ease of doing business, reputation, trust, and support typically rise to the top when customers make their decisions on with whom they will do business. This is backed up by several studies on customer purchase behavior. Customers expect prices to be both fair and in the ballpark of what other competitive vendors are charging.
- In the world of recurring B2B purchases, buying inertia is powerful, and customers form “relationships” with the products, vendors, and processes they’ve used to make repeat purchases. Switching costs are significant, and it is unlikely that a customer will defect due to a minor price discrepancy unless there is a major service failure. Studies show that over 70% of customer defections are due to service failures, and only 17% of customer defections are due to price issues. In short, if you provide good service, customers are not likely to leave you, even if your prices are somewhat higher than your competitors.
- Because of the tremendous leverage pricing has on profitability, it is very rare that lowering prices by itself can generate enough extra demand to achieve incremental profits from such a move. A company with 10% profitability must get better than a 10% increase in volume to offset just a 1% decrease in price. Imagine how much volume must be recovered to offset a 5% decrease in price. In short, lowering prices is typically not a recipe for improved profitability.
- Customers value instantaneous pricing information. In a Hanover study of over 700 procurement professionals, it was revealed that over half of those from companies over $500M would be willing to pay up to 5% higher prices for instantaneous pricing information. Providing instantaneous pricing information has also been shown to significantly improve win rates.
So how does all of this tie together? In short, customers will value their relationship with you if you continue to provide good service, provide fair and rational pricing, and make it instantaneously visible. Furthermore, the temptation to reduce prices is not typically justified, as it is difficult to make up enough profit back in additional volumes. Rather than pricing, investments in improved service levels, pricing consistency, and transparent visibility are likely to have higher ROI in terms of customer value and profitability.
New Pricing Challenges in the Face of the Pandemic
Now the world is changing. How should companies shape their pricing strategies to be as successful as possible under the evolving impacts to the economic and human health of individuals and companies?
Declining Demand: In many markets, demand will decline, at least temporarily, and 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, perhaps through service features that make it easier for customers to do business with them. Customers will value pricing transparency and instantaneous pricing information because it increases trust and strengthens buying relationships.
Supply Chain Disruptions: With the uncertainty of demand over the coming months, there will surely be companies who struggle to apply the requisite resources to ensure the flow of goods and services in their supply chains. It’s very possible that companies experience disruptions from outside forces they can’t control. These potential disruptions could ultimately be seen as service failures through the eyes of customers who don’t understand the big picture. And service failures often become the reason and rationale for customer discount requests and potentially customer defections. It’s important that companies don’t allow the potential of service failures to dictate their pricing strategy. Price given away due to a service failure is very difficult to get back, and it wrongly puts the attention on the price rather than the service fix. Communication with customers can be very valuable here, as you give them confidence you are aware of this possibility and you are putting in extra work to make sure to minimize any disruptions in the supply chain, especially those outside of your control. Customers will appreciate this.
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 business relationships. In the majority of B2B business based on relationships, things tend to run on inertia until something causes a disruption, and a massive pandemic could certainly be that disruption. This reevaluation may include inviting other providers to bid on the business that’s been going to your company. The good news is that while this can seem dire, 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. With the switching costs at stake, this is a good opportunity for incumbent vendors to reinforce the benefits of the existing relationships. Things like trust, institutional knowledge, and organizational momentum have value to existing customers. By contrast, 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. Incumbent vendors should stress these value elements in their sales and marketing materials. But resist the temptation to lower prices unnecessarily. Rather than a low-price message, it’s better to communicate that pricing will always be “fair.” This type of communication tends to take the focus off of price and onto the things that matter most to customers.
“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.
Accelerated Migration to Online Purchases and Sales: Businesses and consumers are more and more being pushed to online and virtual channels to both sell and make purchases. For some companies, this can be an uncomfortable change that they’ve previously been avoiding. But once they get comfortable with the new way of doing business, they may no longer want to go back to the old way. This has consequences for sellers. As customers do more and more business online, they may become more proficient at shopping behaviors that were previously difficult, especially as more companies try to make their own shopping and buying experiences easier. As 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. It is important that companies don’t compete on price with false competition that doesn’t offer equivalent service or product differentiation. A good market price gauge is to monitor the prices at which your company is winning new business. 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. And these things might save your customer significant ancillary cost they don’t always think about.
Given the acceleration to digital channels, companies need to make sure that they are offering an online experience that justifies their pricing. They should make it easier for customers to do business online, and the experience should breed stronger trust with their customers. Pricing consistency, rationality, and sensibility makes customers believe they are being treated fairly. Obviously, the opposite should be avoided. Convoluted price quote request processes can frustrate customers and give them time to shop and buy from your competitors, and it can inadvertently send the message that your company is a laggard in modern technologies and processes to make your customers’ lives better.
Potential business from 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 systems need to be able to support evolving pricing strategies. Pricing guidance systems that use 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.
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:
- Resist the temptation to discount prices unnecessarily. Don’t chase competitors down the pricing spiral. Most of the time it isn’t necessary.
- Instead aim to make your pricing “fair” and representative of your value proposition for each segment you serve.
- 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.
- 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.
- 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.
- 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.
- 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.
Deep down, we all want to help each other. How we focus our efforts related to pricing over the next few months can help our customers, our employees, and our communities emerge stronger from the devastating effects of a nasty pandemic. Sharing our knowledge and experience with each other can ultimately improve lives and help prepare us for future unknown challenges. Together, we can look forward to the many lessons we will learn in the coming months, which I’m sure will reveal opportunities to improve how we become more valuable to those who depend on us. Best wishes as you attack the challenges ahead.