For our January Webinar, Joanne Smith, President at Price to Profits Consulting, explored pricing strategies that both help sustain profitability and bolster the confidence of sales in defending value-based prices during recessionary and inflationary times. After the session, she answered questions from the webinar audience. In this blog, we share part two of her live answers.
What are the most effective ways to clearly communicate pricing changes?
First of all – do it. That’s the biggest tip – do it right now.
Many of us might write customer letters and that can be a very effective way if we’re clear in what we’re doing. By what percent our prices are going up and why. It becomes even better when we put that into the context of a public notice, or maybe articles in our industry magazines on what’s happening with market dynamics.
Even as we go into recessionary times where we maybe aren’t able to increase price (maybe we’re in the hold to the slow the decline), we still want to communicate. Doing so in writing is always the more effective way to communicate than just verbally. In a recessionary time. I might put out a monthly newsletter – a single one page that’s talking about the industry from our perspective. And we might be talking about what’s happening in supply and demand as we see it, and we might even talk about working some subtle messages on cost and inflationary things.
If they are to our advantage, we’ll probably put them in, along with some of the innovations our company is doing for you, or some other key things so that the letter is of some value for them to read, but also is about getting subtle messages in that are the underlying rationale of what our price strategy will be. And of course, written talking points to your salespeople updated periodically as the world changes so that at minimum they’re able to verbalize your strategy very clearly and confidently.
You indicated the importance of setting the right price strategy and modifying the strategy as market conditions change. What role in the organization should drive the strategy change?
Every company is a little bit different. Some people have high level pricing managers that can lead and bring in marketing. They own one of the P’s of marketing – price. Unfortunately, I see too many marketing people think, “I only do the new product pricing. I only own how much premium we get.” Somebody’s has to be thinking more about the strategic industry level price – should the whole market be moving up as well as our value component. So someone should own it – whether it’s product management or whatever is appropriate with your organization, just be clear on who it is.
I always say, “if you’re going to get your best strategy, I love to see it have input from sales who are working the ground, as well as from the product management and marketing. It’s when we bring the strengths of those together that we end up with our best strategy. Because sales is going to be a little more pessimistic because they’re getting hit with the price pressure every day. They are going to see things more tactically deal by deal. And sometimes marketing or other leadership functions are a little bit more removed from that market so they can sit back and look more rationally, but don’t quite have a real understanding of the pressures that are happening together. That input allows your leadership team to make the smartest moves.
Is it possible that the U.S. economy will experience a large drop in demand, yet continue to have high inflation? If so, what should we do?
I believe it is more likely to happen than not. The fed rates going up will drive down demand, so some of us will see demand start to fall in our businesses. But it’ll be a game of catch-up before demand falls enough that inflation stops flowing. I expect in the early stages you’re going to see costs coming in that you have not fully covered. While demand starts to slide more.
It’s difficult, because you don’t have quite as much power as before. The supplier has some power and they have more tactics they can threaten you with. I would go back to what we said in that workshop, look at the pluses and minuses of all your costs compared to the supply and demand, your competitive dynamics, do some of those price, volume, trade-off scenarios – worst case, best case – so that you can come up with what is really an appropriate position and then make sure you are all skilled so that you influence the broader marketplace in the most positive ways.
When markets turn downward such that price increases may no longer be justified, companies often stop focusing on price and shift towards cost cutting. Do you have any advice?
Yeah, and it can be somewhat shortsighted, right? Because the total profit of your company is down, because the total market is down, they suddenly start cutting costs. I go back by saying pricing, by far, is your largest knob on profitability. If you just prematurely and/or unintentionally lose 1- 5% price, that’s going to be the same for some companies as losing 10, 20, 30, maybe even 40% of volume. And this recession probably, I’m thinking, is going to result in maybe 5% market down – give or take, depending on your industry. Your pricing is such a huge knob. I would say if you’re not out proactively communicating, if you don’t have the skills in-house, you will have driven your market price lower than it needed to be.
If profit is what is really driving you, I would look for some of those low-cost ways to really make a fast bang for the buck so that you hold that price as long as possible. I would literally quantify what is a 5% decline in price in terms of the magnitude of that profit as you talk to your leadership, and say, “do you want to risk this? Or can we put a little investment in versus here’s what could potentially happen [to our bottom line]. Leaders that go through a recession when demand is down and think they can make up that profit loss by buying share, by lowering price to try and take share from competitors who are also struggling [are misguided]. Share is a recipe for a price war, and an absolute, guaranteed profit loss for you and your industry.