How to Think About Pricing Strategy During Difficult Times
Pricing is a critical challenge many companies are facing as customers and prospects are requesting, even demanding, discounts, deferred or flexible payment terms, reducing services, and more. For some companies, difficult times may actually weaken competitors, reduce pricing pressures and give you pricing leverage, but for most it’s a time to revisit and rethink our strategies, processes and approach to pricing. How companies respond to these circumstances will in large part determine how they are positioned to bounce back to more normal pricing (or “the new norm”) when conditions improve.
Here are 5 key principles to consider for pricing in a crisis or downturn:
1. Avoid “knee-jerk”, one-size-fits-all price changes and reduce selectively
When responding to a crisis situation it is a common mistake to treat everyone the same and or to just cut price or give concessions without a strategy, such as making broad declarations to not pursue any price increases for renewals or reducing your list prices for all new customers. Resist this temptation and instead respect the value of the solutions you provide and selectively cut, hold, or even increase price on a case-by-case basis. In order to do this effectively you will need to think through how price elasticity works for your products in the current environment for a specific prospect or customer. Tactics will vary (e.g., reducing prices for add-on products or additional licensing while maintaining price on core licensing). Administratively it is not as easy to execute as a one-size-fits-all approach, but the dividends go a long way in driving long term value of the customer and company.
2. Reduce price in temporary ways that protects your long-term price levels and value
Resist changing your “list price” if that would negatively impact your market position or brand in the long-term. Instead, consider the many ways of delivering a lower cost without changing the actual price, such as offering rebates, perishable discounts, free months at the start or end of the contract, free or discounted add-ons or services, free implementation, etc. SaaS companies for example could offer a lower year 1 subscription price that then increases in years 2 and 3 for a committed 3-year contract (step pricing). For the prospect, the lower cost of entry could be a catalyst for moving forward and gives them time to grow into the spend. If you need to give discounts to get the deal, be sure to show the discount next to the list price in your proposal to take credit for the concession and to level-set the customer on the value of what is being provided.
3. Effectively communicate price changes to build trust and loyalty
Effective communication goes a long way in building good relationships. During tough times your customers need help and they need information, and vendors that provide these and are forthright will build loyalty and prosper. Most customers expect per unit price increases over time in addition to increases resulting from an expansion of scope. Be as transparent with your customer as possible about how price is calculated and how that may change over time. Don’t be the vendor that surprises your customer with a renewal invoice that is higher than what they paid last time with no dialogue. The decision and communication of pricing changes is critically important, so ensure the full set of internal stakeholders are involved, the messaging is on point and provide training and scripts to the teams communicating the changes.
4. Strengthen your internal systems and processes to win in the long-term
Few business decisions impact profit margin as significantly as pricing (and discounting). If your company doesn’t already have a strong sales process and pricing “engine”, now is the time to build one. Pricing best practices include: a strong pricing framework that aligns price to value by product, customer segment and channel, a pricing manager (or someone responsible for discount resistance), as well as quality data, reporting and dashboards. Have a playbook and trust (but verify) that the team is executing to the playbook. Take the time to help your team understand the impact of a 5%, 10% or greater discount on the profit margins of the deal. In some cases, a 10% discount could result in a 40% reduction in profitability. If you pay incentives based upon profit margin, a “defend the margin” mindset is inherently built into your compensation plans, but for others this exercise can be a real eye-opener.
5. A strong ROI-based value proposition is your friend
In hard times many companies are reducing staff and or needing to find ways to accomplish the same or more with less. Is your solution going to be a cost or is it an enabler to some other return that more than offsets the price? Sometimes ROIs can be hard to quantify so your prospects will need you to help them with this calculation. If you don’t already, you should utilize a tool or spreadsheet whereby you can illustrate the value one would derive from using your solution or services. Use something that is templatized and requires minimal inputs. You might for example be able to suggest that you can make the average employee more productive by a factor of X and that will generate Y, or that you can reduce waste by X that would yield Y in annual savings. The minimum ante here would be to at least provide some general benchmarks for return (e.g. customers reduce down-time by on average 13%), but ROIs that are more specific to the prospects specific use-case are exponentially more effective and helpful to your champion as they try to sell you internally.
Managing price changes proactively is one of the actions winning companies take during crises and downturns. History also shows us that firms that make use of a recession to build stronger capabilities exit downturns sooner and outperform the competition in the upturn.