*The content and recommendations in this article are based on the situation at the time the article was published (July 7, 2020).
The coronavirus crisis is affecting companies and the economy with full force. The consequences are multifaceted, from the increasing vulnerability of supply chains and the rising number of infections on production lines to added stress on sales teams, which must react to rapidly changing market events. Adding agility to their pricing processes and price models can help companies reduce the impact of the crisis.
The economy and numerous companies are currently contending with a variety of challenges created by the COVID-19 crisis. On the sales side, for example, firms are primarily having to deal with the extremely limited mobility of their sales teams. As a result, many companies are focusing on remote selling and digital channels, accelerating a trend started in the B2C sector affecting B2B sales even before the pandemic.
Short-term price increases are a no-go, but cost increases can be passed on
Companies are having to address another problem created by the current situation: rapidly changing demand profiles. While certain sectors, such as areas of the pharmaceutical industry and mail order business, are experiencing a significant increase in demand from individual customer segments, other industries, such as tourism and automotive, are virtually collapsing. Sales teams need to actively make smart price and offer adjustments. Companies must refrain from implementing massive, short-term price increases at all costs to avoid giving off the impression they’re exploiting their customers in emergency situations. However, it’s necessary to pass on short-term cost increases to consumers, for example, to compensate increased logistics costs and consider changes in demand behavior in pricing over the medium term.
Achieve success during the crisis with 10 pricing measures
Customers are becoming increasingly risk averse and more reluctant to invest. Companies can overcome this challenge too with smart pricing, adapting their offer structure and introducing alternative price models -- most importantly, this involves switching the model from CAPEX to OPEX. Price models that don’t require high initial investments are preferable if liquidity allows it. In addition, companies should place a strong focus on the less volatile service business if this is possible in their current B2B environment.
Clever pricing is the answer to numerous problems caused by the coronavirus crisis. Based on our project experience, we have identified 10 pricing measures to enable your B2B company to emerge from the crisis more successful than before. These measures can be divided into three main groups:
1. Correct outliers and past mistakes
2. Implement scarcity pricing, where appropriate
3. Focus on highly differentiated products
4. Bundle offers and implement versioning
5. Introduce less expensive alternatives
6. Change the price model from CAPEX to OPEX
7. Revise surcharges and prices for services
8. Only lower prices where it will have a positive effect
9. Grant clever discounts and link them with conditions
10. Reduce the risk for customers through contract modalities
To identify the measures that are right for your company, you should start by critically reviewing and evaluating your customer and product portfolios, which will ultimately enable you to develop a differentiated approach.
First define targets, then identify measures
Before introducing any operational pricing measures, it’s necessary to define a clear strategy. Particularly in the context of the current crisis, you can only determine the right means to achieve your strategic targets once you have clarified what these targets are. Targets relevant to pricing range from stronger sales, more market share, and better capacity utilization to higher profits and cash flow, with each objective having different implications for pricing.
It’s important to keep in mind that the overall market tends to shrink in many areas during a crisis. In addition, a constant market share in a dwindling overall market often results in a reduction in sales. Companies aiming to keep their sales constant typically implement an aggressive pricing strategy. However, you should think carefully before taking such an approach, particularly in a crisis environment, as it’s likely to trigger potential competitive reactions, increasing the risk of price wars and a further downward spiral.
Use customer and product segmentation as the basis for pricing decisions
The crisis can affect areas of the product and customer portfolios in significantly different ways. Companies are strongly recommended to conduct a targeted review and evaluation as the basis for a differentiated pricing approach. Customers can be pragmatically classified according to, for example, size, crisis winner or loser, and probability of default. Companies can also divide the product portfolio relatively easily according to sales relevance (fast-moving items), lifecycle, type of business (machine vs. service business), or degree of differentiation. This creates a good starting point for making pricing decisions in a pragmatic way.
Even if you know which pricing measures are right for your company, you shouldn’t neglect to consider communication and implementation. It’s important to provide sales teams with guidance on communication and prepare and support implementation in a targeted manner. By developing communication measures and arguments for changing prices centrally, you can significantly improve the stringency of your pricing measures and, as a result, the probability that they will succeed.