McKinsey: pricing through the COVID-19 pandemic
In many industries, radical shifts in costs, demand and supply availability have snarled previously predictable market pricing mechanisms. The most effective companies are quickly adapting to customers’ immediate and changing needs while they consider longer-term implications for their businesses. Based on our research and experience from past economic crises, the most resilient companies put in place practices during the downturn that prepare them to succeed when the recovery comes. While these lessons are clear, they don’t take into account the unprecedented nature of the current public-health crisis, which is a complicating factor that needs to be considered.
To prepare for the recovery, companies must identify their primary sources of revenue and make the moves necessary now to ensure they persist and grow. This may include launching targeted campaigns to win back loyal customers; developing customer experiences focused on increased health and safety; creating flexible payment terms and digitising sales channels to name but a few.
Adjusting pricing and promotions is a crucial part of this mix. For pricing leaders, there are three areas that are the most important to focus on: being creative in meeting customer needs while preserving value, driving strong pricing discipline, and investing boldly in capabilities for the future.
Be creative in meeting customer needs
Forward-thinking companies find more creative ways to meet customer needs than simply dropping the price. They preserve value while remaining flexible, and build long-term customer loyalty as a result of short-term concessions and exceptions due to COVID-19. There are a number of different approaches that companies can take to achieve this, including:
Adjusting terms and conditions. Flexible terms can make customers more willing to make purchases. For example, a few weeks into the coronavirus outbreak, several manufacturers with healthy balance sheets extended their customers’ payment terms to help them manage cash flow. Companies in many industries can find opportunities like these—including: adding terms to provide protection from volatile costs, reducing behaviors that raise costs or recoup the costs of those behaviors, or improving payment flows.
Providing temporary offers. How companies adjust prices and communicate the changes to customers can impact near-term performance and the prospects for a strong recovery. Many companies reflexively slash list prices in a downturn, for example, but flexing discounts while holding list prices constant is often better at stimulating demand.
Adjusting products or services to meet changing needs. Many companies adopt defensive postures during a slowdown, focusing almost exclusively on their existing customers and therefore miss opportunities as other companies double down on their pursuit of new business. The most effective companies evaluate customer preferences and buying patterns to understand how each customer segment will be affected by the downturn, choose prospects more efficiently, and tailor messages and prices accordingly.
Drive a strong pricing-discipline mindset
In this era of unprecedented challenges, suppliers that emerge from the crisis in a good position will likely be those that take a “through-cycle” view of their customer interactions and pricing policies. This requires discipline from sales teams to strike the right balance between capturing value through pricing and being sensitive to and meeting customers’ changing needs. In a sharp downturn, that discipline may slip. While every company may need to give in on price in certain situations, the most successful organisations build better pricing discipline in a few different ways, such as:
Tighten the governance for discounting and approvals. Clear pricing guidelines and escalation processes become more important in challenging market conditions. More companies are now investing in “deal desks” to accelerate quotations, review requests for exceptions, and prioritise strategic investments in the most valuable clients over less- differentiated discounting practices.
Identify pockets of lost value. The pricing function should actively monitor customer-level profitability and review pricing policies to identify the pockets of lost value that needlessly eat into the bottom line. That includes carefully monitoring volume discounts, rebates, and cash discounts to make sure they’re earned and evaluating whether prices and fees account for cost to serve (such as freight and sales support).
Monitor and actively manage pricing policies and decisions. During a slowdown, companies should review their pricing policies more frequently and adjust them as conditions change. Without this extra attention and quick action, every step in a transaction can destroy profits. For example, some companies have revisited their minimum-order-quantity (MOQ) threshold and adjusted it downward to account for lower demand. At the same time, they have stepped up enforcement of pricing policies such as margin floors, MOQs, freight charges (by using system flags added to their quoting system), and stricter exceptions management.
Invest boldly in capabilities
In our experience, some of the most thoughtful pricing leaders take advantage of slowdowns to invest in the future. They build pricing excellence by making cost-effective advances in three main areas:
Build value-selling capabilities. The pandemic is forcing many B2B sales teams to work remotely. Many companies have accelerated the conversion of in-person value-selling training materials into a combination of online video modules, gamified programs, and testing. They are taking advantage of their stay-at-home sales-rep model to build skills that are often overdue.
Upgrade advanced analytics for better insights. Companies that update their algorithms to develop analytically driven, statistically rigorous, and near-real-time assessments of pricing dynamics, win/loss rate, and customer willingness to pay are much more likely to capture the value from pricing. Coupled with access to good data should be a commitment to using it, a discipline that’s crucial these days to avoid making often costly snap decisions based on anxiety or “stories from the field.”
Strengthen the pricing talent bench. The leaders of the most resilient firms are now asking how their talent and tools enable pricing excellence and how they can close gaps. For organisations that have been struggling to add the right resources and capabilities in the midst of globalisation and the war for talent, the crisis presents a unique opportunity to bolster the commercial organisation with seasoned and sophisticated talent that may otherwise be difficult to obtain.
The most high-performing companies are able to pursue their strategies consistently through economic cycles—including agile, precise, and disciplined pricing. Top pricing leaders look at the world through “strategic bifocals,” keeping a close watch on near-term resilience while pursuing long-term goals in order to emerge stronger when the recovery begins.