Blog, Pricing

Think Twice Before Doing This With Your Pricing

By Stephan Liozu
May 26, 2020

Right now, most businesses are focusing on staying in business, securing available assistance, and maintaining what is most likely a fairly fragile business base. Does this mean we are at the end of the disruption stage and starting a stabilization stage?

In the last month, I have written about what to do in pricing and how to prepare for the rebound, whether it is on a sharp or slow-paced curve. I have also written about how to manage value and assist your finance team in managing cash. Today, I want to highlight some of the things we should not do during this stage of disruption.

A List of Don’ts

  1. Don’t give discounts that are out of line with corporate guidelines. Understand what the corporate guidelines and short-term priorities are and make sure they are loud and clear on what to do and not to do in pricing. Stay away from what is not approved or in sync with the priorities.
  2. Don’t start a price war (intentionally or unintentionally) by giving concessions that might upset competitors. Every company is on edge right now. Now is not the time to start a war. This needs to be communicated to the customer-facing employees as soon as possible.
  3. Don’t exchange concessions for something else. If you support your customers or distributors with concessions, make sure you exchange these for a permanent change in business rules, cost-to-serve, or access to information. Also make sure this is documented in writing.
  4. Don’t give discounts instead of offering freebies, upgrades or contract extensions. The key here is not to touch the price level but to give a concession that represents significant value for the customer and lower cost for you. For example, you can offer free upgrade for a premium service or extend an optional feature for a quarter or two.
  5. Don’t focus on cost to serve the short term. This is where most executives miss the boat. When facing such a devastating drop in business, they do not pay enough attention to their waterfall analysis and look for non-pricing related costs. When supply and demand drop significantly, it is time to remove just-in-time services, move deliveries from 24 hours to 48 hours, or discontinue partial load shipments. These are called business rules and they may cost you dearly. Now is the time to revisit them and to make changes for the long-term.
  6. Don’t give payment terms extensions right now. You need to resist payment term extension requests. The impact on cash flow is too hard right now. Unless your company is cash-rich, you want to focus on offering prompt discount payment or significant cash payment conditions. Not the other around. Make sure you discuss this with your finance team.
  7. Don’t give concessions not included in contract and firm agreements. Contracts and agreements are your guiding documents for the commercial relationship with your customers. They need to be enforced which means you need to know about them. Concessions that are not in the contracts and agreements might not be acceptable if these documents do not have a force majeure exit clause. If you do decide to give concessions, make sure they are documented and acted upon as an amendment to the contracts. They need to be short term in nature with a start and an end date.
  8. Don’t try to buy current or future market share now. We discussed price wars in point 2. Another bad idea is to buy future market share now with price concessions. First, we do not know the level of future demand. Second, it is not a good idea to impact your P&L with discount if the business is booming back to the levels of 2019. That would be a tremendous negative impact to your margins that is not justifiable. Stay away from action aimed at buying back the business.

In these times of chaos, there are plenty of opportunities to make mistakes. If you are an experienced pricer, you have been through previous crises and you will avoid these mistakes. If you are new to pricing, work closely with your peers and ask for guidance. Forming a pricing task force or a price war room is the best way to interact with experienced folks.

Remember that professional and price buyers are paid to get concessions and they might use this crisis to extract goodies from you whether they need them or not. We are not out of the disruption stage. Things are too hectic right now. Avoid mistakes now that might make the next stage complicated for your business.

For more on how to elevate your pricing and commercial excellence, particularly though today’s economic downturn, listen in on any of our series of virtual events from Commercial Excellence Month. 

 

  • discounting , payment terms , price war , pricing

    Stephan Liozu

    Stephan M. Liozu, Ph.D. is the Chief Value Officer of Thales Group and is the Founder of Value Innoruption Advisors, a consulting boutique specializing in pricing, value, and change management. Stephan holds a Ph.D. in Management from Case Western Reserve University where he researched the topic of transformational change and leadership in pricing.