Several years ago I wrote a post Should You Lower Prices in a Recession? with a framework for making pricing decisions during a recession. I have recently read new posts from other pricing professionals with generally similar advice for pricing strategies during these turbulent times caused by the coronavirus. All these posts are all helpful, but they implicitly assume that the readers (you) and your customers are not in danger of failing. Well, what if your position is a bit more precarious, and you do not have much time? You never want to panic, but when your businesses’ near-term viability is at stake, consider some short-term pricing strategies for survival.
As with any question of pricing, there are multiple segments of customers and the answers are not all the same. Let’s separate the question into some logical groups of companies.
Short and long-term demand is steady and growing
Even with our economy tanking, there are several industries with robust demand for the foreseeable future, like healthcare, groceries, paper products, internet services, streaming video, pizza delivery firms, etc. Unless some fool in your industry has started a price war, there is no need to lower any prices. Maintain your strategy, use your analytics, and set prices according to the value you provide to your customers. Don’t be greedy. If you shock your customers now with large price increases just because you can, you will pay for it in the long term.
You have been forced to close or scale back by the government or health officials
Some businesses like sports stadiums, amusement parks, concert halls, gyms, and bars have been ordered to close. Others have been forced to offer carry-out service only. These businesses typically have high fixed costs that must be covered. For closed businesses that are purely transactional, like bars, offering lower prices, bundles, etc. will do nothing if you are not allowed to open your doors. On the other hand, you could offer things with greater future value in exchange for payment now:
- Gift certificates redeemable in the future for a discounted price now.
- Loyalty memberships. Join now for a regular monthly fee and receive one free meal for each month you are closed, plus discounts on everything when you can open again.
Businesses like restaurants and golf clubs are not allowed to offer dine-in service, but they can offer carry-out or delivery. These firms are losing sales of alcohol and they are also experiencing reduced numbers of diners, but not all customers are the same. Some customers need to save money themselves because of their own financial condition, and they just cook at home; while other customers don’t want to cook or have time to cook. Lowering prices on existing products might increase the demand of the financially sensitive customers, but it would cannibalize the revenue from the full-price, don’t-want-to-cook crowd. A better option would be to create some new offers at lower prices that cost you less to produce. That would let you maintain revenue from the full-price customers.
Also, remember there are other people who are worried about any human interaction and do not want to be exposed to a delivery person or a restaurant employee. They are not staying away for economic reasons, so lowering prices would not move the needle.
For those businesses who sold tickets in advance such as concert venues, honor the tickets in the future. If your survival is in question, e.g., you may run out of cash before you open again, consider VIP memberships. Pay monthly fees now in exchange for early access to future tickets plus vouchers for admission and/or food and drink at future events.
B2B volume has dropped precipitously due to social distancing
Many foodservice distributors, restaurant equipment providers, janitorial and sanitation products distributors, commercial building maintenance firms, and promotional product providers are examples of businesses with severe drops in B2B customers. The customers of these firms did not leave because of pricing, they left because their own customers left. So, simply lowering prices in an effort to stimulate demand is unlikely to work. That said, some of the customers that use these types of suppliers are in precarious condition themselves and will be looking for help.
If you are running one of these B2B service providers, be thoughtful about how you help your customers. Extending payment terms would help your customers, but also adds to your own risk. As an alternative, look for ways to offer de-scoped products in exchange for lower prices.
- Offer efficiency discounts for fewer, larger orders
- Offer house brand products or less-expensive grades with lower prices
- Extend lease terms on equipment for slightly lower payments
- Reduce the number of visits (cleaning, landscaping, etc.) for reduced monthly fees. This will allow customers to save money, but discourage them from discontinuing service altogether
Remember also, that some segments of these B2B providers may be stable or growing. You should avoid creating offers that could cannibalize the business of your healthy segments.
B2C providers with moderate slowdowns
Some entities that provide services in people’s homes are beginning to feel pressure. Electricians, A/C repair, home cleaning services, and pest control providers must enter their customers’ homes to provide services, and some customers simply do not want the risk of others entering their homes. I have spoken to individuals who have canceled their services or are deferring some services if they can avoid it. In these situations, lower prices will not solve your customers’ problems. They are not worried about money; they are worried about their health.
Address your customers’ anxieties. Let your customers know their health is critical to you. Communicate how you are ensuring that your employees are healthy and maintain sanitary conditions. Begin sending your employees out with nitrile gloves and painter’s masks. This is not a pricing problem, so don’t try to solve it with prices.
There are many more types of businesses that I have not addressed. Some are doing well and are likely to make it through the health scares unscathed. Others will feel the effects, some of which will be severe. When volumes decline, there is often a knee-jerk reaction to lower prices and protect that volume, but that can be a mistake. No matter your type of business, make sure you are addressing the problem:
- Focusing on your customers and their needs is always critical
- Don’t view your customers as all the same. Look at the segments independently
- Identify where/how you provide value to your customers and communicate it to your customers and your employees
- Identify where demand can be increased through pricing and where it can’t
- Don’t lower prices below your variable cost – you will just make the problem worse
- Solve your near-term critical problems first, but don’t do it in a way that ruins your long-term
Good luck, stay safe, and serve your customers as well as you can