In a McKinsey article (subscription required), they talk about pricing in a downturn. I’ve summarized some of their thinking and modified it for the marketing audience.
(I really like McKinsey. We often follow them within our clients after they’ve completed their work – not because they didn’t do good work, but rather because there is so much work to do after they leave.)
Pricing is always a challenge, and more so in a downturn. Demand decreases, price sensitivity increases, competitive pricing often declines and the cost of sales increases, ultimately lowering margins. So, rather than just lower your prices, what can you do?
- Watch for shifts in price structure: It can be easy to watch the sales organization create unique deals to make sales happen, which have an impact on changing the way pricing is done. Sometimes this is acceptable. But it should be done in the context of understanding the long-term impact, not just on a per-deal basis. For example, it’s possible that a change in price structure for one deal will open up opportunities in other accounts as well, if approached from a corporate-wide perspective.
- Monitor customer-level profitability: As prices decline, you may find that some customers become unprofitable. Others become less profitable and should be approached differently than those with higher profitability.
- Adjust to changing customer needs: Through market research and direct contact, you can determine how economics are changing for customers. The question to ask is – how can we restructure our pricing to address the changes our customers are facing?
- Update price sensitivity research – often: Your customers are facing cost-management challenges. Your competitors are making pricing changes. The research you completed a short while ago may already be out of date.
However, a key point missing from the McKinsey work is related to understanding the needs of non-customers and how that can impact your pricing strategy in a downturn. To learn more about this critical step, see What’s Your Market IQ?
What do you see as important steps to take in pricing in this economic climate?
Thanks for the comments Glenn. What strikes me as the most important part here is that market inflection points are a great opportunity for an organization to proactively (re)connect with their customers. To reaffirm their wants and needs, get additional feedback, and make sure any messaging is spot on. So whether it is with a focus group, social network, or even old fashioned picking up the phone to say hello - having a conversation with your customers will only improve their opinion of your organization. And then, you may not need to drop your prices!