B2B Pricing with COVID-19Tuesday, July 7, 2020
The impact of COVID-19 on the world has been drastic, both to us personally and in our business lives.
Lockdowns have had huge immediate impact on business activity with great uncertainty on when “normality” will return, combined with the prospect of a longer-term recession.
Many companies are facing severe short-term pressures, and understandably look to pass this on to their suppliers via price negotiations.
At OC&C we work extensively across B2B industries – helping our clients respond to the immediate shocks on their businesses right now, whilst preserving and enhancing their long-term strength and value.
With this aim in mind, how should B2B companies think about reacting to pricing pressures?
1. Integrity first
With the country and economy in crisis, in our view it is critical for businesses to be fair and take care of customers, colleagues and other stakeholders, as well as owners and shareholders.
Actions in this crisis will have long-term impacts on your relationships and trust with customers, your reputation and your brand.
Remember the human impact on relationships and reputation as well as the financial. An ill-considered price rise, or lack of flexibility with customers, may have significant long-term downside.
2. Understand the issues
As ever the start of strategy formation is understanding the starting point, what issues we are solving for and the key constraints.
Most commonly, the issue will be pricing pressure coming from customers facing their own Covid-related challenges. However, there are also likely to be internal constraints and trade-offs that need to be acknowledged.
- Clients’ problems - What problems are your customers facing today? Are they facing short-term cash constraints? Or looking to manage cost-base for a prolonged downturn?
- Own limits - What are the commercial realities of your own business? Given cashflow and cost base, what level of price flexibility can you support? How do you trade-off short-term vs medium-term revenue?
3. Remember your pricing fundamentals
While your customers will be facing significant challenges, and integrity dictates that you should do your part to assist, it is important to keep in mind your pricing power fundamentals – these may or may not have been impacted by COVID (they might even have been improved!):
- Value-Add and criticality - How critical is our product to our client? How much value does it add to clients / what is ROI? Has this value been reduced by Covid? Or does Covid make your product more important than ever?
- Alternatives - What are the alternatives to our product? Do they deliver the same level of value? How are they priced?
- Switchability - What are the costs / barriers to switching? How significant are these vs a potential saving for clients? Does Covid change customers’ appetite to switch? (Eg limited management bandwidth and lower risk appetite could actually reduce desire to switch)
4. Think segmentally
In our experience the best way to think about pricing is by segment, with blanket approaches nearly always suboptimal.
This may include different customer verticals, geographies and customer sizes, as well as different elements of your proposition.
In the crisis different customer segments may well be facing different concerns, and your importance to them will vary too. Consider:
- What are the different segments in your customer base today?
- How do the pricing fundamentals look for each segment, and for the different elements of your proposition?
- Which segments are more resilient to COVID? Which will be most severely disrupted?
5. Don’t lock yourself in
In the 2008-09 Financial Crisis EU producer prices fell c.8% as companies cut price lists, and then took until 2011 to recover back to the same level.
The “business as usual” price increase most B2B companies can achieve is dwarfed by potential pressure from COVID, so – if your own trading position allows – lean towards temporary measures (eg payment delays) over longer-term discounts that could take several years to unwind.
If looking to gain share through pricing, again make this a temporary discount. This can still be very aggressive if desired! For example, Zoopla (UK property classifieds) is offering nine months of free usage if estate agents commit to leaving its rival Rightmove. After that point, agents pay normal pricing.
6. Consider all your options
The range of potential actions is large, and simple discounts are not necessarily the right answer to pricing pressure. Think clearly about the customer pain points and what will help, whilst maintaining sight for your own commercial goals.
For existing customers that are facing cashflow or cost constraints, consider:
- Temporary discounts or deferring / spreading payments
- Avoiding a negotiation solely on price – make it a trade-off against functionality / product tier
- Unbundling elements of the proposition
- Linking price to a volumetric / usage metric – it becomes a variable cost, but you benefit from their future recovery
- Offer free trials to incentivise X-sell (in particular for modules that help address COVID impact, e.g. remote working, automation / cost saving)
And of course, think about what can you ask for in return. We often find B2B companies have areas where value “leaks” (eg rebates, unbilled costs to serve) – short term flexibility may be an opportunity to address long standing issues. Alternatively, there may be opportunities to displace a competitor and encourage a shift to single sourcing.
For new customers, aim to de-risk the purchase and defer cash outlays to the budget constrained buyer, without impacting long term price point. Consider:
- Discounted implementation and onboarding services
- Longer trial periods
- Payment (temporarily) linked to results
- Lessening volume constraints
7. Plan for opportunities beyond the crisis
Covid-19 requires an immediate set of short-term actions, but it is also accelerating shifts in industries and creating opportunities. Competitive shares are changing, and some players may go bust.
How do these changing dynamics impact the value, and pricing, of your proposition – and where might the proposition need to evolve to capture new areas of opportunity?
What is the impact on your overall growth strategy – and how can a strong price architecture, with a nuanced segmental approach, and price mechanisms that offer exposure to growth, support your long-term success?
There is great uncertainty, but thinking strategically, with your value proposition at the core, will put you in the best position to capitalise on the opportunities that arise.
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