Pricing during volatile & inflationary times
Pricing is always an important topic for companies, but in these days of high inflation and disrupted supply chains — as well as the uncertainty brought about by the pandemic — it’s become critical. Yet many companies are struggling, not having had to flex their pricing increase muscles for a few years.
“Pricing is a product-centric idea,” says Ian Tidswell, an independent consultant focusing on B2B pricing and the co-founder of Ideal Price.
Pricing is usually set depending on how much a product costs to make, profit margin goals, and what the competition is doing.
“But you can leave a lot of money on the table if you price too high, or too low,” he cautions.
Tidswell spoke to Umbrex members in a virtual event, sharing what they can do to please their clients while also keeping their prices and services sustainable. Tidswell has been working with companies for the last twenty years on how to create innovative offers and prices that customers will accept.
In the interactive session, Tidswell discussed when and how to increase prices, how to build in flexibility to adjust prices when necessary, and how behavioral psychology can help increase price acceptance.
He presented two sides to dealing with inflation and uncertainty:
- Establishing price agility in inflammatory and uncertain times.
- How to talk about prices with customers.
Tidswell recommends taking an approach that starts with what the customer values, then figures out what your solution does for the price, and lastly making sure that cost is measurable.
With this approach, he says there is a “much better chance of capturing a bigger share of the value you’ve created, and using that to define more optimized prices.”
Successful pricing: balancing the customer and supplier value
Tidswell says to be successful with pricing, it’s about achieving a balance between the offer of products and services with the price. The customer values the offer, and the supplier values the price.
Customer values and supplier values do not differ much. The customers want to buy based on the value they receive, while suppliers are capturing the value they have created through the price.
Both are considering risk exposure, such as how much risk they take compared to the cost and availability of the product.
They are also considering the “time to value” — how long it will take to get value from the product, either from the customer view of the product creating a solution, or the supplier view of generating revenue within a reasonable time frame.
“The balance beam is wobbling because of changes, and we need to get better at balancing them,” Tidswell said.
Breaking down the pricing elements
Tidswell defined the price agenda as that which sets pricing, objectives, and priorities in line with the strategy. He encouraged asking yourself questions such as:
- What are you trying to achieve?
- How is the pricing aligned with your overall strategy and objectives?
Next, he broke down the pricing agenda into three parts:
- Portfolio pricing: Set pricing for offers for end and direct customers. What are the list prices and net price?
- Commercial terms: Define and manage customer and channel incentives to drive desired behavior. What discounts or rivets are received for selling through distributors? How can you align with the incentives?
- Pricing execution: Define, execute, monitor, and manage guidelines and exceptions across the pricing processes. How will you execute and monitor guidelines that drive people? How do you manage the exceptions?
Tidswell added that using data-driven pricing insights leads to better decision-making.
Portfolio pricing and commercial terms can be used to help these four things:
- Grow top-line revenue.
- Improve or defend profitability.
- Strengthen channel relationships.
- Manage and minimize risks.
Start by reassessing your commercial priorities given the evolving crisis situation. In a crisis, you might want to focus on minimizing risk more than before.
“Sometimes a more defensive approach makes sense, and sometimes a more aggressive one does,” Tidswell said.
It is also important to decide how much supply to give to committed orders versus spot or thought orders. Are you willing to commit to longer term orders for a lower price, or take on orders with a higher variable but which have a higher price on average?
“Think through how to balance between long term and thought order clients,” he said.
During inflationary times, costs need to be managed as they go up, but those changing costs usually lead to a need to change the pricing.
“We need to be continually assessing what’s going on,” he said.
He recommends having contingency and mitigation plans. “In the pricing space, this becomes much more important than in the normal market.”
The decision tree
Tidswell introduced the concept of a “decision tree” to help think through the shortage and price increase planning.
“What is your decision around your cost versus the competitor cost?”
You can develop a decision tree by:
- Listing potential concerns in supplier supply alongside the competitor supply.
- Listing issues with the supplier cost of goods sold with the competitor cost of goods sold (COGS).
- Consider this question: “What should you do based on which of the situations you’re in?”
By working your way through each scenario, the solution can be made for potential issues that can arise in a crisis situation.
Consider a scenario in which you are short on supply, but the competitor isn’t. You may have to raise prices, but Tidswell recommends this be balanced by strengthening the strategic relationships.
“Thinking through what you will do if certain contingencies happen is super important,” he said. “It’s developing plans based on what may happen, so you can react quickly if it does happen.”
Action commitments to make for risk mitigation and contingency planning include:
- Emphasize value in public communications, and react quickly once competitor prices are clear.
- Set campaign duration immediately upon allocation update.
- Prepare contingency plans for situations.
Portfolio pricing: focus on value
“Many companies don’t even think about raising prices, and the ones that do don’t always do it very aggressively,” Tidswell said.
With pricing, figuring out the value is the most important aspect. Determining the value of your product relative to the next best alternative is the key step.
Then you should identify the value barriers — the areas where your offer is less attractive to customers.
Tidswell recommends prioritizing the top value sources and barriers.
”Doing this in a qualitative way is helpful in understanding where the value comes from, and this is a way to get clear on the value of your products.”
A helpful way of understanding value is to create a value map.
Create a value map with the price being on a Y axis, and the benefit of the product being on the X axis. Map out your products along with the next best alternative. See where the products lie compared to each other.
Tidswell gave an example using models of cars on the value map. “A BMW might have high value with a high price, but we see a Ford Focus with a low price with a high value.”
What the customer values can change, and in a crisis, they may look for the low price with a high value.
A value map should continuously be updated, so you can see the changes that happen with products.
“Value maps can help understand where the opportunities are, and once you have them in place, they are great for understanding where things need to change. This also drives great conversation about where we are at in value, where the challenges are, and where gaps are in the market,” Tidswell said.
The next step Tidswell recommends is to segment your product portfolio. He says by segmenting the products, this should influence price decisions.
Products can be placed into three segments:
- Pull Products: Differentiated products with high profits. Focus on value pricing for these products, and maintain these as premium products.
- Push Products: Less differentiated, with high profits. Closely track prices of customers’ alternate options and ensure high margins for distributors or retailers.
- Low and very-low profit: Less room for incentives, follow the market.
There are two ways to influence a price increase:
- Raising the list price.
- Adjusting the discounts and rebates.
“Price increase is great for showing market leadership, and lets the whole market know there needs to be an adjustment here,” Tidswell said.
With a price increase, there needs to be a detailed explanation to customers.
Discounting rebate adjustments is often a much easier way to increase your bottom-line price, but can be confusing internally and with customers.
“A combination of these makes sense,” he advised. “Raise the list price, then back off with bigger discounts and rebates.”
∫e aggressive with raising list prices, and more agile with rebates and discount adjustments.
Price execution: Listen, communicate, act
When it comes to communicating price increases, over communicate — both internally and with customers.
“It pays to help your customers have insights into what’s going on in the market,” Tidswell said.
This is especially necessary in a time of crisis, as it helps people feel in control and more comfortable, and helps them manage new challenges. Communication can help calm customers, reduce fears, and build trust.
Increase the frequency of price and policy changes, and make sure the price exception processes are really working so they do not create problems.
How to talk to customers about prices
Traditional selling is based on purely economic considerations:
- Understanding what the customers want.
- Defining the offer.
- Estimating the value and understanding the willingness to pay.
- Selling the value vs. the next best alternative.
“When people make buying decisions, they act in irrational yet consistent ways that we can understand,” Tidswell said.
A closer approach to how people are selling is to how to understand what the customer wants and what they value. Customers have new and evolving concerns and needs. It’s about balancing gain and pain with customers.
“People fear losses much more than they value gain,” he said. “If you gain $100 it only feels half as good as if you lose $100.”
Customers are going to be nervous about price increases, even if there is upside potential. In the current uncertain climate, there is a fear of shortages and price increases — and a gain can be simply having a product available for customers in a crisis situation.
“Sometimes customers are happy to pay more just because they can get their hands immediately on a product,” Tidswell pointed out.
He advised to focus on the list price and give discounts from that, rather than using net prices with a price increase. This is looked at as avoiding a loss by earning a discount. A discount is always looked at as a gain, even if the customers are spending the money.
Understand how the customer decides
Customers prioritize and decide differently today. A way to understand their decision-making process is by profiling customers based on their “pricing typology.”
- Bargain hunters: These customers want a good deal. They are more attracted to the price rather than what the product does. Offer a high list price with big discounts, and don’t waste time discussing value with these customers.
- Risk avoiders: These are people who just don’t want to get ripped off. Price interest is high for these customers. Emphasize risk, mitigate it, and highlight security of supply.
- Price accepters: These customers understand value and are not sensitive to price. They want the best value for the price. These are people who know they want it and why they want it, they know the value and will pay a higher price for that. Sell the value and invest in the relationship; don’t hurry to provide a discount to these customers.
- Routine buyers: These customers know what they are getting and don’t pay much attention to the price. They have high value knowledge. Sell the value and emphasize continuity of supply.
- Indifferent buyers: They don’t care about price, they just want to get it done and have the product. An example would be buying gas for your car. Make it super easy for customers to do business with the product.
Tidswell encourages thinking about “Good/Better/Best” pricing, which is offering one product at three different prices and value levels. Data shows that customers like to buy the middle option. He strongly recommends this pricing tactic, and giving clients three to four options.
Customer risk tolerance
Different customers have different risk tolerance, and this will influence which offers are most attractive to them.
Tidswell gave a few factors that have been known to influence risk tolerance:
- Financial cushion
- Business experience
- Perception of business outlook
- Severity of failure
“It’s worth thinking about customers’ risk tolerance, and trying to tailor offers to them,” he recommended.
Estimating the value and price acceptance
“This is about framing the decision-making process to try and get customers to accept a higher price,” Tidswell said.
He explained what is called the “anchoring effect” — people are guided by a reference point and compare that to similar things.
From a pricing perspective, how can you get people to compare your product to something else that makes yours preferable?
It’s helpful to look at what customers will compare your price to, and how that comparison can be influenced to benefit you.
Some comparisons customers make include:
- Direct competition
- Indirect competition
- Similar purchases
“Identify and promote numbers you want your customers to compare your price with,” Tidswell said.
List pricing is beneficial because the lower-priced products will give the customer a sense they got a good deal, and the higher-priced products will give higher value to the customer.
Price can even affect customers’ perception of product performance. Tidswell gave an example of people feeling that an expensive pain killer was more effective than another pill that was exactly the same, but a cheaper price.
Influencing the buying decision
“The reasons you give for why prices have gone up are very important,” Tidswell said. “Price adjustments should be accompanied by statements that reaffirm the value of the product.”
Avoid being perceived as price gouging during a shortage situation. “People are much more tolerant of price if logistics came up, than if it was perceived as a market shortage or using market power,” Tidswell said.
Explain to customers the reasons for a price increase, whether that is manufacturer costs, environmental requirements, benefits for employees, or reinforcing the supply chain.
When you’re in a shortage situation, be very strategic with who you work with. Customers will remember who price gouged during a crisis.
There are multiple tactics for presenting price increases:
- Communicate price increase as a percentage rather than dollar amount.
- When possible, avoid using the dollar symbol, as it can have a negative psychological value.
- Present prices from high to low when applicable; it gives a sense of giving something up as the price is lowered.
- Present prices as usage equivalents (price per unit, kg, lb).
- Use smaller font sizes for discounts and to present your prices; this generates the feeling the price is low.
Preparation is key to effective communication with your customer.
“Think about the objectives. Be clear who the audience is, craft the message, and listen to the feedback — and correct it and take action,” Tidswell said.
His last piece of advice was to always check with legal, and never talk with your competitors about pricing.
For more on this topic, listen to the Unleashed Podcast Episode 69 with Ian Tidswell on Pricing Excellence:
About Ian Tidswell
Ian Tidswell focuses on helping companies (from startup to global leaders) improve their pricing performance through coaching, training, mentoring, and consulting. With almost 20 years focused on B2B pricing, his range of experience across all aspects of pricing across multiple industries enables him to help clients to quickly make sustainable improvements in their pricing outcomes based on proven methods. Ian holds a PhD in Physics from Harvard University, is an alumnus of McKinsey & Company, and calls Basel, Switzerland his home.