Although there is a possible economic recovery on the horizon, it will still take time for markets to return to normal trading conditions. In this fierce environment, companies are desperately seeking opportunities to secure or return to profitability. As traditional options for cost reduction have become exhausted, a structured and optimised approach to pricing is needed to protect your company’s profits in the short term, and to prepare for future growth once the market conditions improve.
Below are some pricing levers that can act as best practices across B2B industries.
1. Reduce volume, not price and clearly communicate it to the market
In contrast to previous recessions, a higher proportion of market leaders understand the rules of the market. Instead of reducing prices in an attempt to gain volume from competitors (potentially triggering price wars) they cut production to maintain price levels. As a cut in production is less harmful to profits than a cut in price, companies such as ArcelorMittal drastically reduced production around the world to combat oversupply. Unfortunately, some sectors ignored this approach, as the disastrous results in the automotive industry demonstrate.
2. Provide alternatives at the lower end of market
Many customers are no longer willing to pay for top-tier products in certain categories. Instead of focusing on the higher end of the market and then selling at high discount levels, an alternative mid- or lower-tier range can reduce pressure on price levels. Furthermore, contamination of premium segments can be avoided if stringent price fencing is applied. Whilst this is appropriate during times of crisis, it is also relevant when companies enter lower price regions like Asia.
3. Maintain high prices for specialty products/services
Whilst high-volume products are under significant pressure, this may not be the case over the whole product portfolio. Even in times of crisis, strong competitive advantages and USPs should be exploited systematically. An undifferentiated price reduction across the portfolio is seldom necessary and will be extremely detrimental to profitability.
4. Offer discounts-in-kind
Non-monetary rewards (i.e. free freight) have several advantages. Specifically, price levels remain stable and prices are not contaminated as the reward can be stopped more easily than traditional discounts. They are also useful during contract negotiations as potential concessions rather than actual price reductions.
5. Treat customers differently
Not all customers will leave immediately if price reductions are not given. Many will face significant costs if they change suppliers; others may lack suitable alternatives or are simply loyal due to longstanding relationships. Furthermore, many customers instinctively migrate to financially stable and established suppliers in times of crisis. Therefore a general price reduction across all customer accounts should also be avoided.
6. Increase profits in services
With companies postponing investment in new equipment, the after-sales business naturally gains in importance. In addition, value-added services as a source of revenue are often neglected. As a result, sales resources and targets should be adjusted to these profit opportunities.
7. Improve price monitoring and controlling
Pricing excellence is inexorably linked to transparency. Companies cannot afford to accept profit leakages simply due to a lack of transparency on various stages of the price waterfall. In my experience, many B2B companies still have limited visibility on rebates, freight/packaging costs and payment terms that can have a significant impact on that actual pocket price (net of all monetary and discount-in-kind rewards).
8. Use incentives to enforce price discipline
Where price controlling protects the company from undesirable pricing decisions, a balanced incentive system will set the right focus on securing revenue and profitability. Best-in-class companies manage to show their sales force the impact of every single price decision on their salary (without necessarily divulging costs) thereby giving them a strong guidance on how to balance volume
against margin.
If customers still request price reductions even after applying these best practices, there are a number of reasonable approaches you could take. If existing contracts are there, insist on fulfilment (at least at the smaller accounts) as you fought for them too long to simply let go without negotiation. If discounts and rebates are linked to volumes, use these existing links to increase pressure on customers. In certain cases, communicate that a price increase has been introduced as significantly lower volumes have altered your fixed-cost recovery. Finally, it is vital to remember that your pricing decisions set the profit course for your company – hastily made decisions today will be difficult to correct, even when the markets return to growth.
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