Pandemic Cost Shocks and Pricing Q&A

by | Feb 17, 2022 | Pricing

HomeBlogPricingPandemic Cost Shocks and Pricing Q&A

For our January Webinar, Tim J. Smith, Ph.D., CEO at Wiglaf Pricing, shared case studies from a dozen leading enterprises, exploring the pricing actions they have taken in the past year and ways they used customer value, differentiation, and proactive price management to sustain outcomes in an uncertain environment. After the session, he answered questions from the webinar audience. In this blog, we share his live answers.

What are some good strategies for overcoming price increase objections in B2B sales conversations? Should I focus on outcomes/value delivered?

That’s the whole point of this particular talk, it that you’re actually going to have that conversation over price. I was looking at a syllabus down at the University of Arizona, where they teach pricing strategy, and the syllabus had this statement: take a look at the other market variables – your product, your promotion, your placement, your brand, your offering design, all of that’s about creating value for the customer. Price is about capturing it.

So in that conversation, yes, you are going to bring up price directly. But you’ll have the backbone to refer back to the benefits being delivered. And this is where the LeveragePoint tool would come in. Because you can actually quantify how important this is, and as the cost of competitors change, you can quantify the importance of this price increase. You can show them the benefits, you can show them the value. You say, “yes, I know this cost increase is painful, but it must be done or we cannot reliably deliver to you.”

What are some common internal objections to shifting price strategies in turbulent economic times?

I hear it directly coming out of product managers often because the product managers say something like, “I work so hard to build this share,” or “I want the volume.” I even hear the “I’ll make it up in volume. I have returns – economies of scale.” And I’ll say, “you can’t make it up in volume. Pilgrim’s Pride went bankrupt for doing that.” Your value as a product manager is related to actually delivering profit dollars, not just revenue. For these examples, the companies also point out that by raising prices, they increased not just profits, but they also increased revenue. And in this particular pandemic time, it’s an opportunity to raise your prices faster than cost of inflation and make some more money.

Companies often have to make pricing decisions on an ongoing basis, sometimes requiring multiple price increases. How would you suggest dealing with these decisions multiple times in a year?

I think that’s where a lot of companies, especially in the CPG area, got caught flat-footed. They just simply did not have the apparatus to manage prices differently; to make price updates more frequently. I actually talked with more than one company that says “I technologically cannot raise prices in midyear because if I did, I would mess up my rebate calculations. I wouldn’t know how to do it.” So I’m getting answers as weird as “my technology doesn’t allow me to do it often.”

It has become so clear during the pandemic how many companies are used to an annual price increase. The pandemic made it clear, like with the bicycle manufacturer or with meat, annual price increases are not enough. With meat you can change a price every day, and sometimes it is necessary. The idea of taking a set of customers and saying, “I don’t like the contract we have with you, it’s not working for us. Let’s renegotiate it,” meaning let’s tear up our current agreement and make new ones or we’re not doing business with you anymore. That’s a pretty radical claim, but UPS was well served by it.

This is an opportunity to raise your prices, but you need to have the apparatus (meaning the people, process, and tools), the organizational structure (or at least somebody on your side) helping your CEO to not make a bad decision of chasing volume. Like what Pilgrim’s Pride did. And I bring up Pilgrim’s Pride because, that wasn’t that long ago – it was around 2004 they had this big problem. We didn’t have a big recession then, but we had a big one in 2009.

These business crises are going to keep coming at us. That is part of life. Unless you work for the government, you’re living in a volatile environment and that’s the whole issue here. And you have to manage that volatility both when the cost goes up and when the cost goes down and this is an opportunity right now to raise your prices. And if you don’t, you may be either be swallowed up, or bought out, or simply go bankrupt.

What are some strategies for overcoming irrational pricing behavior by competitors?

Well, this is where McDonald’s comes to mind. Because not all of McDonald’s competitors raise prices. Remember how long Subway had the $5 footlong? They stuck with because they made songs about it until eventually it didn’t work anymore because they couldn’t make money. I live in Chicago where it’s wonderfully brisk outside and we have plenty of Vienna beef hotdog stands. The cost of a hotdog did not go up much. Chicago is also the headquarters of McDonald’s. So we have the hotdog stands not raising prices, but people still go to McDonald’s and they are raising prices. You know, that’s just reality.

You have to make decisions given the reality that you work in. Yes, your competitors can be stupid. I remember the CEO of Continental before it was bought by United used to say, “I can’t price any higher than the stupidest competitor.” There’s some truth to that, but it’s not all true because there is something else called value. If you are delivering value in your customer, and they see it and knowledge it, they’ll say “yes, the competitor over here is changing prices or staying low, you’re worth more. I can pay you more because I can’t get this good of service, this good of product from anybody else.”

How do present economic conditions impact the way B2B companies price services, both standalone and add-on?

Well, it’s causing some companies that used to provide services for free to either look at charging for the services or actually breaking it out and turning into another offering. Peloton famously did that, where they charge a $350 installation fee – how do you buy a Peloton without putting it in your house? I don’t know that works out, but they are acknowledging this.

You have people clarifying what it is their services do for customers and then trying to charge for it. And not all the customers are happy with it, but it happens. And UPS is a company that I would argue is purely a service business. It’s moving packages around as a service for another business and they raise their prices quite well. A part of their price increase was related to acknowledging that if Christmas orders are not pre-placed. If I don’t buy the capacity ahead of time around Christmas – I can’t run my processing plant properly. And then packages get late. And nobody wants a Christmas cake after Christmas. They are basically promising to get things to customers on time only if they reserve capacity. And if you don’t serve capacity, they won’t serve you. So the cost of services are going up to related to the cost of the labor and everything else.

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