25th March, 2020

Pricing in difficult economic times

In this article, MYOB chief economist Jon Manning provides his guidance on how to calibrate your pricing strategy for an economic downturn or recession.

Twelve years ago, when the GFC broke, I was firmly entrenched on the speaking circuit, running pricing workshops all the way from Melbourne to Mumbai, and all points in between.

During the course of those workshops, a fair chunk of time was spent exploring what pricing opportunities, initiatives and strategies could be employed by businesses, large and small, in the face of decimated economic activity.

And while the magnitude of the economic impact of the COVID-19 pandemic may eclipse the financial wreckage of the GFC, its worth sharing those initiatives in the hope that some of them can be re-used this time around.

Given you’re probably being bombarded with COVID-19 emails from hotels you stayed at (by accident) 15 years ago, I’m going to write predominately in bullet points so you can use this article as a quick checklist.

The first thing worth mentioning is optimism: there are opportunities to be found in depressed economic conditions:

  • Thomas Edison founded General Electric during the recession of 1876
  • Walt Disney founded his company during the 1923 recession, while Estée Lauder established her cosmetics company during the Great Depression (when she had noticed women buying more lipstick)
  • Charles Schwab started his discounting brokerage business during the 1974 recession, the year before Bill Gates started Microsoft, which itself was the year before Steve Jobs co-founded Apple
  • More recently, IBM launched the PC during the 1981 recession, and Bartercard launched during the recession about a decade later.

As these examples attest to, this sort of economic climate is a time when customers, entrepreneurs and established businesses are willing to try innovative and new business, products and services to see if they meet their customer’s needs.

The second thing to keep in mind is that demand does not weaken at the same rate and at the same time, across all markets and customers. True, some industries have fallen over a cliff almost overnight this time around (aviation being just one example), while others are going gangbusters (medical equipment).

Businesses in industries where demand has evaporated lose the ability to set prices because consumer behaviour has changed dramatically. For example:

  • Consumers will do many things differently, including paying with cash to get the best price, mention to competition more often, and in the absence of price reductions, they will ask for extras and value-adds and buy (even stockpiling) jumbo packs of products
  • They will make products (like toilet paper and tissues) last longer, trade down from favourite to cheaper brands (abandoning any brand loyalty), and shop late at night in supermarkets in anticipation of end-of-day use-by mark-downs
  • People will also get things repaired (shoes, etc.), rather than just purchase a new pair. Or they’ll abandon services altogether, and do things themselves (e.g., dog grooming)
  • Consumers are likely to resort to haggling more often or, even more extreme, start using bartering website sites (Bartercard, NextDoor)

So, what do you do?

The first thing you need to do is re-evaluate your product offering:

  • Has the value of your product increased, decreased or stayed the same? (much easier to do when you apply value-based pricing than, say, cost plus pricing). Because yes, in some case, your product or service may have just become more valuable in these difficult economic times
  • You also need to identify which products and services are going to remain essential to customers through the downturn, and which products are going to become discretionary purchases (more on this shortly)
  • Also, identify whether you have any complimentary products, the sale of which facilitates the sale of another products or service (defend these products)
  • And finally try not to cutback on quality, as this will come back to haunt you in good time. As Benjamin Franklin once said, “the bitterness of poor quality remains long after the sweetness of low price is forgotten”

The next thing is to take stock of your customers:

  • High-value, relationship customers are more likely to sustain your business in this economic climate than low-value transactional customers
  • Your messaging to customer’s needs to change – you need to be helping them through the bad times, not shoving product down their throat
  • Because you’ve distinguished between essential and discretionary products above, the focus of selling should be on the essentials and the fundamentals, not the discretionary
  • You should accept that retaining a customer on a lower-priced product is a better outcome that losing them altogether
  • Larger corporate customers will try to consolidate suppliers, so ask them what else they are buying and from whom (expansion sales to existing customers will become even more critical to your company’s growth)
  • Customers are going to be less likely to upgrade or buy more from you if they aren’t seeing or achieving any value, or their desired outcome

The next thing to do involve re-evaluating your physical locations (if applicable):

  • As well as discontinuing under-performing products and services, also close underperforming locations. It’s easier to do this incrementally earlier, than taking a broad-brush approach later
  • Where locations do get closed, provide alternatives (locations, products, transitional arrangements for those adversely affected)
  • Re-prioritize geographic markets (some will slow down faster than others), and conversely…
  • Retain locations and products that will rebound strongly. You’ll need them during the recovery

So, if businesses lose the ability to set prices because consumer behaviour has changed so dramatically, is there anything that can be done about pricing?

Yes, there are lots of things you can do. Here’s a list:

  1. First and foremost, hold or halt any planned or in-progress price increases. They are not going to stick in the current environment, and the PR backlash could be astronomical
  2. Revisit your terms and conditions (T&C), which is how you get the prices you set. Can you provide better payment terms, or can you assist with financing arrangements, for example?
  3. Are there extra’s or value-adds that you can provide without increasing your own cost base (like electronic data interchange, advice or research, for example)?
  4. Don’t adopt a blanket approach to all customers. Assess any hardship concerns on a customer-by-customer basis if possible
  5. When considering price changes, base your decision on changing customer needs, and not on changing competitor’s prices
  6. Don’t just drop the price. Drop the value as well (“sure, we can do it for that price, but I can’t include X, Y & Z”)
  7. If you sell in advance (e.g. vouchers, travel and accommodation reservations, etc.), make those vouchers or credits valid for two or three years, rather than just 3 or 6 months. It might take a while for consumer confidence to rebound
  8. Run promotions and discounts, but make sure they are ‘date-boxed’ (with defined start/end dates), and are temporary, rather than permanent discounts
  9. If you run second or tertiary brand, cut support to them, and focus on your primary, stronger brand
  10. Monitor customer behavior and competitors pricing more regularly. If you have a pricing forum/council/committee, this should now meet a bit more frequently, as well as changing prices more frequently too
  11. Reward your loyal customers, and convert new walk-ups/walk-ins by adding them to a mailing list
  12. Find ways to de-risk big purchases for your customers. In 2009, Hyundai offered to buy their cars back if customers lost their job. The US car market fell by 20% in 2009, but Hyundai’s sales increased by 8%, and they only purchased 50 cars back from customers in the first 9 months of this campaign. Virgin Mobile USA also offered a similar ‘pink slip protection” around the same time
  13. Finally, there is also a few behavioural economics or pricing psychology hack you can employ:
    • If you sell bundled products and services, by unbundling them you will create a cheaper perceived price point. Be careful this doesn’t backfire though – customers hate being “nickeled-and-dimed”
    • Also look at scaling back available optional extras to simplify your pricing and offering
    • Re-package or reconfigure package sizes and combinations to obtain cheaper perceived price points
    •  Introduce some decoy prices – high ‘shock’ prices that will make alternatives more attractive
    • Mention the daily equivalent price, rather than a weekly, monthly or annual price
    • Focus on the difference: if the price is $20 and the customer wants to pay $15, focus the discussion on the $5
    • Provide social proof: this is our most popular product

It’s tough out there right now. But if any of these article helps you to change the way you think about your pricing strategy at this time, then I believe reading it will be time well spent.