Article by Michael Hurwich, President of SPMG
Buffeted by turbulent economic times, businesses need to re-examine their business and pricing strategies to deal with the uncertainties that lie ahead. But remember, all recessions come to an end. Make your pricing decisions with an eye to the future. While some will find opportunities in short-term tactical pricing; others will develop an entirely new business strategy to take advantage of competitive weaknesses; others still, will choose to simply "weather the storm." Regardless of which tactical approach is selected, every company in turbulent times must re-evaluate the issue of price and value as it relates to their customers.
Time For a Value Driven Approach
Turbulent markets bring with them a new level of competitive intensity. Companies face not only a shrinking market as customers cut back operations and put projects on-hold, but also new competition as nontraditional competitors look for ways to offset losses in their traditional businesses. More competition, a shrinking market -if ever there was a time to take a "value-driven" approach, this is it. If a company is to remain competitive in this new dynamic environment, it must examine how it adds value for its customers and how it can help mitigate the potential losses and slowdowns that loom ahead. Suppliers should also note that in tough economic times, the tangibility of benefits becomes a real issue. Customers need to know and appreciate that they are indeed receiving a benefit. Typically value is highest when the customer realizes some hard savings (whether in time or money), where the numbers are easily measured, and to a lesser extent when the product or service contributes to the customer's market share. Conversely, intangible benefits equate to less value.
Check Your Options
How can companies respond to turbulent markets?
Some introduce tactical short-term measures while others revise their entire value proposition and pricing strategy to position themselves to take full advantage up the inevitable upturn. Others may decide simply to "weather the storm". "Turbulent economic times can offer significant opportunities for companies with the resources to position themselves for the upturn that is bound to follow. Well positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth." Each response needs to be evaluated in terms of the market, the customers, the competitive dynamics and whether or not the anticipated duration of the downturn warrants short-term or long-term strategic moves.
Tactical Discounting: In the short term, most companies reduce prices to reflect economic conditions and maintain volumes in the face of declining demand and increased competition. They should not, however, neglect to get something in return. Customers may be more than willing to make a commitment that they will accept a return to normal pricing after tough times are over. Many companies opt to be even more promotional, introducing larger discounts and better payment terms (including in some cases financing packages). This will allow sellers to reduce their "final" prices to their customers while maintaining the integrity of their list prices.
Once the economy recovers, discounts can be gradually reduced until normal pricing is reestablished. Companies may also want to consider "locking-in" prices. If suppliers expect prices to continue to drop in the future, it may well be worth "locking-in" customers at current levels. While current price levels may generate some immediate losses, they will offset potentially greater losses over the longer term. Get Strategic: Business slowdowns and shaky economic conditions should set off alarms that the business and pricing strategy needs to be re-visited. Companies need to make a full internal and external analysis of their products and product mix in order to revise the value proposition through "value-added" means and/or price changes. They also need to consider what other strategic alternatives may be available. Turbulent economic times may offer significant opportunities for companies with the resources to strategically position themselves for the upturn that is bound to follow. Well-positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth.
Weathering the Storm: Doing nothing can be as valid a strategic decision as any other. However, the decision to weather the storm must take into account two key factors: the switching behavior of customers and the potential impact of losses on the company. A shrinking market and new non-traditional competitors will inevitably result in losses in market share. At the heart of "weathering the storm", therefore, is a risk assessment of switching behavior. The question that companies need to ask is "to what extent can we expect to re-gain the customers that we lose today?" It is not an easy question to answer and depends very much upon the loyalty of one's customers and the value that they perceive in the products and services that a supplier offers. In doing the risk assessment, one factor that often gets overlooked is the life cycle of the product. Products early in their life cycle have a significantly higher probability of regaining lost customers than those in the latter stages of their life cycle.
Which strategic approach a company adopts depends on numerous factors and often a sensible argument can be made for any of the three alternatives. One factor companies should consider is the anticipated duration and depth of the downturn, which will determine the balance between short and long-term initiatives. Companies should also remember that downturns, as painful as they may be, always come to an end. Any pricing initiatives taken in turbulent times should always be done with an eye to the inevitable upturn. Pricing in a shaky economy requires more not less strategic thinking than in good times. Success depends upon both attitude and approach. The experience of the last recession shows that companies that viewed turbulent times as a pricing opportunity succeeded far better than those who regarded it as a threat.
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