For our February Webinar, Joanne Smith, President at Price to Profits Consulting, shared actionable pricing strategies for periods of economic transition and uncertainty, best practices in slowing price decline during tough times, and ways to proactively capture value as macroeconomic conditions begin to recover. After the session, she answered questions from the webinar audience. In this blog, we share part one of her live answers.
You mentioned that during major market transitions, businesses are better off doing broad-based increases rather than at a customer or customer group level. Can you expand on this?
As Brian just shared, what LeveragePoint does well is helping to measure value and use cases, and that’s critically important for specialty products and offerings. But there are three parts of price that we have to do well, and that’s just one piece. There are transactional pieces as well as strategic pieces where we account for these major changes in the industry, so we’re almost doing a reset of our entire market – going up or going down, and of course our premium gap likely stays that way.
With these major changes, we don’t have time to do the really deep value in use because we’ve already done that. Maybe we know from using LeveragePoint that we deserve 7% premium, so we move the market up, then we still keep 7%. We keep those gaps in play. Too often I see marketing people think of prices and focus on just the brand-new product or the really unique products. That’s great – you have to do that. But do not miss that for the bulk of your products in the big dollars, we need to manage them when the markets are undergoing major changes.
How can you capture the business your customers are walking away from when you are probably too expensive?
When we do one of my courses (or if you’re doing analysis on your own), we actually do some pre-work to understand what risk we have. We might look at a 5% increase and compare it to a 5% decrease. Then, I have the whole sales team weigh into the range of share loss possibilities that we’ve set up. So the math comes right out, and we realize how much of that is really at risk. Sometimes by losing a little bit of volume, you can make far more money by getting your price to the highest point.
Virtually every time I do this – I would say 99% of the time – when sales shares their range of possibilities, what they think is the worst-case share loss (or even expected share loss) never happens. What share loss they have is usually far, far less if they’re using best practices with confidence and based on fairness. I would tell you that there is a very strong correlation between businesses that are both willing to work with customers that pay fairly, and are also willing to walk away from price buyers that will not pay, with a higher profit share. When you’re willing to walk away from it, you actually lose less and it is a very high correlation.
Some customers want to use an index to automate price up/down when the market moves significantly. Can you discuss the pros and cons of this?
I say to go there gently and thoughtfully. There is a place for indexes, but I’m not a big fan of them. We can get too indexed, which commodity products often do. The customer really likes it because now they can control you and lock you into only the movement of one raw material. You have got to be very creative and clever in how you write it, so you still have the ability to move in tight markets, so I go very gently there.
Now having said that, if you were a company where the sales team is terrible at price increases and you just couldn’t get them to have the courage and do things, an index would be better than having a really weak team. But I think most of the audience have very professional sales teams and that this would not necessarily apply. There are a couple of sweet spots where we do want to use them but not for most companies generally.
Is there a universal predictor that should be included in pricing analysis regardless of industry, such as inflation?
You’re almost always going to want some level of cost in there. It can be your actual cost, your forecasted cost, or it could be a key raw material that might be indexed – things you can look up. For many industries, you’re going to want to supply or a demand component at minimum, so we know if we are taking off or if the market is coming down. If you are the type of industry that is capacity-constrained in tough times, a supply and demand tightness metric is needed. It’s almost always going to be these primary inputs more than anything unless you have a unique situation around things such as regulations or political events.
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