A Commercial Perspective in the Time of COVID-19

April 01, 2020

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*The insights and recommendations shared in this article are based on the circumstances as of April 01st, 2020
 
Millions of people around the world are presently, in one form or another, self-isolated or locked down. Business, as we knew it for the first bustling months of 2020, has ground to a stand-still. The Eurozone’s Purchasing Managers Index, one of the most well-regarded metrics of EU economic activity, has dropped to 31.4 in March from 51.6 in February - everything below 50 indicative of an economic slowdown. This presently is the lowest point in the history of the index. What started as a health crisis has rapidly permeated through all elements of modern day society and has created an economic downturn the depth of which still no one can fully quantify.
 
From the present depths of the economic slowdown however, it should be well remembered that this dip was not caused by any underlying fault with the current global economic system. If history serves as a benchmark, we would be expecting a “V”-shaped bounce back to the economy after the pandemic is over as was seen at the end of the 1918 Spanish Flu.
 

Now that we are in the left leg of the V-curve, it is unavoidable for many companies to cut costs and downsize parts of the business. But let us remember that we are in a crisis of demand, not a crisis of costs. Hence, everything that can be done to keep revenue up should be prioritized to lessen draconian cost cutting measures that will jeopardize future earnings potential. Yet it is precisely in the midst of this downturn that the companies who initiate or accelerate topline initiatives will outperform on the economic bounce back, and here are five reasons why.

1. There is a life –and a reputation– after COVID-19
Consumers continue to consume and have shifted their spending to other channels. E-commerce, even in novel formats like grocery delivery, is currently experiencing steep growth. Amazon is hiring 100.000 warehouse and delivery works amid coronavirus shutdowns and the Dutch e-learning platform Magister was temporary offline due to the large amount of children and parents logging in at the same time.
 
Record-breaking demand has also seen its share of exploitative behaviors. On March 24, Amazon announced suspensions to more than 3,900 vendor accounts for price gouging on products related to COVID-19. Although dynamic pricing is a strong mechanism to react to smaller changes in demand and competitor moves, it can of course lead to unfair pricing in the current circumstances.
 
The key takeaway is that companies with a recurring revenue model or prominent customer loyalty program should be conscious and ready to react even when they are unable to serve their customers in this present crisis. Gyms for example have voluntarily suspended membership fees while hotels and airlines have offered creative solutions to extend the validity of loyalty programs.
 

B2C anecdotes typically receive the most media exposure, but also in the B2B environment can you make or break your reputation by either taking advantage of your suddenly increased demand or by showing indifference to your customers. Some beer brewers have already proactively prolonged their payment terms for vulnerable entrepreneurs in the catering industry. Financial institutions loudly proclaim they want to be part of the solution and help smaller businesses and low-income individuals better weather the current crisis, perhaps reticent of their experiences from the 2008 recession.

2. Trusted relationships are developed in difficult times

One thing we are learning these past few weeks is that our digital infrastructure is pretty good. Broadband networks are coping very well with the peak in usage and working from home functions well for many companies with some being surprised at the efficacy of remote arrangements. However for sales teams, it is also clearer now than ever before that building relationships is best done in person.

In this uncertain time, it is best to take a measured approach to cold selling. An ineffectual attempt now may burn a relationship that otherwise would have benefited from a more adept, in-person touch later. Only if clear opportunities present themselves, such as companies looking for new sources of supply or actively diversifying their supply risk, it may be worthwhile to go out and offer solutions in the cold.
 

For the majority of companies presently, it is better to invest time and effort into what is a much surer bet: nurturing your key accounts and relationships. Reaching out, asking questions, and creating mutual understanding for the circumstances and priorities. It would be strange indeed to have a fruitful business relationship, but in times of crisis your counterparts suddenly don’t hear from you anymore. Where possible, support in scenario planning and over-deliver on services. Companies that gain the mindshare now stand to benefit much quicker from when the economy recovers later. This counts even more for top-to-top relationships, where challenges and opportunities can be discussed without previous or current deal making pressure.

3. There is a burning platform to introduce smart business and pricing models
Over the last decade of nominally steady growth, companies continually planned for business model innovations but have not always had the burning platform to fully implement. Now is an opportunity to realize those plans:
 
  • Transform your customer’s CAPEX to OPEX. Usage-based pricing is a safer option for customers that shy away from large upfront investments in the current financial environment. Moreover, when usage increases after the crisis, earnings will accordingly grow. A famous example is Michelin, which switched its price model for truck tires from a one-off payment to a price per kilometer. Customers only paid when they used their tires and Michelin installed a future proof recurring revenue model.
  • Scale digital propositions fast. Across industries and within all stages of the value chain, the current crisis is stress testing digital strategies. Many consumer goods companies have been slow in developing their online direct-to-consumer proposition, mainly intended to protect traditional retailers. With empty streets and shopping centers, it is now important to bring consumers into your branded online space. In the period of December to February, Nike reported more than 30% growth in its online sales in greater China versus the same period last year. Nike’s total business in the country still fell 5%, yet this would have been far more without their strong direct sales strategy.      
  • Introduce a less expensive alternative. Price often trumps quality in times of a crisis. Lowering prices without lowering quality or performance lowers profitability, and is difficult to regain once the situation stabilizes. Hence, it pays off to de-bundle products and services to offer a competitive price on solutions considered ‘good enough’. ‘Nice-to-have’ extras can be monetized as separately and at a premium. The cost-to-serve is subsequently reduced and the increased price transparency results in more justifiable pricing.  
4. Now is the ideal time to reposition commercial organizations for future growth

For some firms, as demand collapses in one channel, resources and efforts need to be shifted in order to grow another. Many food and beverage companies have a strong footprint in both the retail and out-of-home channel. One cannot presently image two more distinct business climates. Out-of-home has shrunk down to near-zero due to lockdowns, whereas retail business is thriving.

It is an essential exercise to reimagine how things will be different after the crisis and what a successful commercial organization will look like in the future. In some industries and categories, COVID-19 is likely to lead to permanent shifts in channel behaviour yet in other channels behaviour may be indifferent from before the crisis. In most cases it will actually only speed up shifts that have already started. Consequently, here it makes sense that short and long term organizational changes are as aligned as possible based on key questions such as:
  • How will the market look like post-COVID19, including the customer and competitive landscape?
  • Is our go-to-market model future proof? Should we still sell everything to everyone and everywhere?
  • Do we sufficiently prioritize the future winners among our customers?
  • Do we need a centralized key account strategy to the rise of Amazon and hard discounters?
  • What should our revised commercial organization look like in terms of FTE allocation, competences and enablers?

More agile commercial organizations will succeed by restructuring as necessary, adapt its competencies, and invest in systems enablers in preparation for the eventual economic rebound.      

5. Procurement does not stand still
The 2008 financial crisis told the story that procurement came out much stronger than sales organizations. The focus on cost-cutting and the improved balance of power versus suppliers have helped procurement functions develop into long-term, stable strategic capabilities.'
 
The first priority of procurement in times of crisis is ensuring continuity of supply, closely followed by leveraging the potential for cost savings in sourcing. Retailers, hard discount in particular, will ask their suppliers how they can make products more competitive (read: cheaper). As a supplier, this question should be countered by a more relevant question: what can we do jointly to come out on top in the upward leg of the V-shape? To take the lead in this conversation and prevent long term loss of pricing power, suppliers should be prepared to understand the current and future behavior and willingness-to-pay of the consumer across channels.
 

Manufacturers need to safeguard brand equity in order not to erode margins. Research from Simon-Kucher & Partners over the past few years consistently showed that the cross industry price increase success rate has only been 30%. Price reductions should be carefully evaluated, as it will be hard to get prices back up afterwards.

Summary

For many companies, the demand drop caused by the current crisis—and especially the speed of the downturn—is unprecedented. For companies that entered the downturn in a healthy situation, the V-shaped revenue scenario would suggest they should take extra precautions in cost-cutting measures that could jeopardize their future earnings potential. The commercial leadership of companies should prepare for the bounce-back by safeguarding reputation, investing in key relationships, introducing smart pricing and business models, and preparing for a win-win dialogue with procurement.