How to Prepare Your Pricing Strategy for a Volatile Market
Recently MarketWatch said, “While a looming U.S. recession isn’t a foregone conclusion, CEOs of America’s biggest banks have been warning about the risks for months.” While forecasts shift and warnings heighten, businesses are left with the weighty decision of what to do and when. In this article, we outline the importance of preparation, proceeding with purpose and clarity, and key steps that can be taken now to favorably navigate uncertain market conditions.
Pricing in the Current Environment
In October, core inflation price levels in the U.S. increased year-over-year for producers by 6.7%. While year-over-year inflation rates are beginning to stabilize and reduce, they remain significantly higher than 2020 levels and much higher than the Federal Reserve’s target rate of 2%. Amidst easing supply chain constraints and concerns about economic forecasts, many companies are facing a mixed environment that is predominantly inflationary with pockets of deflation and weakening demand.
Prices for certain commodities such as asphalt, iron, and steel are cooling down. Additionally, we are seeing freight declining off its previously high peaks. Some distributors are cutting back on inventory levels, creating pressure on suppliers’ volumes. Meanwhile, other industries tend not to experience declines in demand during a downturn, and so far have demonstrated resilience. Given the mixed nature of inflation and the variability in volume trends, it’s clear that economic impacts will vary by geography, product, and customer end market. It’s important for businesses to account for these dynamics through nuanced, precise, and segmented responses.
While the timing and depth of a downturn may be uncertain, and the impacts of it may vary by industry and end market, now is the time to start preparing. Companies should be developing now a strategic pricing approach that defers a dip, minimizes the magnitude of a dip, and allows for a quicker acceleration out of a potential decline.
How to Prepare Your Pricing Strategy for Market Volatility or a Potential Recession
For many companies, there is still an opportunity for inflation-based pricing actions, and this may dissipate over time. For businesses that are behind on taking price increases, it is especially important to set the rules of engagements with customers now to avoid an adverse situation where costs go down and customers ask for deeper discounts that you are not prepared for (a double whammy).
In parallel, now is the optimal time to sharpen your defenses, put focused initiative into your pricing function, and turn pricing excellence into a true competitive advantage.
Below we review 3 key areas companies should be acting on now to prepare your pricing organization in advance of uncertainty ahead:
- Improve customer and competitor insights to inform your market response
- Build your price execution discipline
- Enhance agility to effectively react to market conditions
#1 – Improve Customer and Competitor Insights to Inform Market Response
Every business has indicators they use to understand current market conditions and how their business is affected. These can include end-use demand trends, raw material indices, industry capacity utilization or inventory, tracking of win/loss rates or customer churn rates, changes in sales pipeline metrics, including time-to-close, or other macro/microeconomic trends. If you aren’t already tracking these, begin by identifying the right factors for your business and setting up mechanisms to regularly review and analyze. This will help provide a set of factual data points specific to your business versus generic market information, news anecdotes, or even rumors. These data points will ground your pricing strategy and decisions throughout future market changes and allow you to act with confidence and assuredness.
In addition to public or internal market indicators, businesses should also consider conducting and refreshing market research as a way to baseline conditions and track changes over time. In our experience, both competitor and buyer behavior, as well as supplier dynamics, can shift materially in periods of uncertainty and volatility. This is an excellent time to double down on your market research in order to keep your customers’ perspectives current, enabling you to increase your levels of customer intimacy. The most effective companies evaluate customer preferences and buying patterns to understand how each customer segment will be affected by changing conditions, choose prospects more efficiently, and tailor messages and prices accordingly.
Companies should consider running new pricing-sensitivity research and market price tests, particularly for higher-volume products and offerings. A variety of market research approaches are available – including demand pattern analysis, customer perspectives on buying patterns, key buying factors, willingness-to-pay, and supplier value propositions – to gain a more robust perspective on market opportunities, obtain voice-of-the-customer, and inform a segmented, tailored set of strategies.
As market conditions change, buyer behavior will as well. Understanding the root cause of why demand is changing will inform how best to address it. While there may be calls to cut list prices across the board, this is often not the best answer to unlocking more volume, protecting near or longer-term profits, or meeting the customers’ true needs. Market research may reveal that that the needs of some segments of the customer base can be better met with a new value proposition, which could include changes to the underlying product or service, revised financial or non-financial incentives, or a redesigned contract structure. One-size-fits-all approaches will typically be suboptimal, as some products and services are counter-cyclical (and so may have additional upside) and changes in conditions will have variable impacts by geography, end market, and other factors. Keeping all these factors in mind is critical to a successful shift in your pricing strategy.
Market research and other lawful means of gathering competitive intelligence can also improve awareness of your competitive landscape and enable you to respond productively. You may start to hear claims that competitors are reacting “irrationally” and selling below cost. But this may just be anecdote or rumor that runs the risk of triggering a price war due to a misread. Competitors may announce capacity moves (such as shutting down lines or plants ) or may become weakened and increasingly cash oriented. Having robust fact-based information or research and a game-plan of how best to respond will enable you to plan both offensive and defensive moves, to react more nimbly, and avoid a misstep.
#2 – Build Your Price Execution Discipline
Tighten up processes, governance, and authority levels
Clear pricing guidelines and escalation processes become more important in uncertain market conditions. Businesses should plan to review their pricing processes more frequently and adjust them as conditions change. For example, many companies invest in “deal desks” to accelerate quotations, review requests for exceptions, and prioritize strategic investments in the most valuable customers versus less-differentiated discounting practices.
Another way to tighten up governance is to establish a commercial or pricing center of excellence that can take a long-term view to avoid panic reactions and develop clear guidelines and objectives for the commercial team. This council can steward large and strategic deals and oversee execution, speeding up deal review for impacted segments while maintaining discipline. This group may also look at where profit leaks are occurring, for example, and adjust pricing terms that are not being enforced or aren’t serving your end goals.
If you don’t already have a way to measure compliance to existing pricing processes and policies, it’s critical to build that functionality and manage more actively going forward. If your sales teams don’t already follow existing discounting governance or there’s no way to understand and approve discount levels, it will only get worse in times of volatility. Measurement and compliance can be implemented through effective data analytics, pricing tools, and review cadences that bring to light and redirect unwanted behavior.
Train and prepare for negotiations
While always a valuable tool in strategic pricing, negotiations become even more crucial in times of market uncertainty. If your business encounters changes in demand, your sales teams will be defenseless to customer demands without compelling and practical negotiation skills training. Good negotiation training and planning is an instrumental force that builds confidence and clear expectations of how to handle and escalate customer conversations that balance customer and company interests.
Investment in your sellers’ capabilities through negotiation training helps the sales teams better handle objections and pushbacks, while also updating their skillset in value selling and pricing. In addition to training, negotiation preparation can be implemented through creating account scorecards that document information such as current price/margin, expected questions and pushback, what’s most important to that customer, unfavorable factors, example concessions, and possible negotiation offerings. In our experience, negotiation training and preparation is the catalyst that transforms a decent price execution organization into a great one.
Contract management
One way governance and leakage management can play out is through contract management. It may be the case that your existing contract terms do not fit the current market situation, nor are they prepared for future shifts. Now is the right time to conduct a deep review of customer contract language to understand the landscape of renewal time periods, where price can be adjusted, which customers have which terms, and where terms and price reviews should be prioritized.
You may have contracts with index prices tied to deflating raw materials, contracts for which inflation-adjustments have not been enforced, or rebate structures that are misaligned with the intent and purpose of the program. Consider also you have optimized your mix of spot versus long term contracts and whether it should be adjusted to decrease volatility exposure. In parallel, increase support and preparation for what may become increasingly challenging contract negotiations.
Once appropriate contract terms and policies are set, companies should build and execute a plan to enforce them. We find that it’s easy for sales teams to offer giveaways such as payment or rebate terms to uneasy customers. Over time, these giveaways—just like unearned discounts—add up and turn into price leaks that contribute toward missed goals. Businesses with excellent contract management systems also house contract information in a database that allows them visibility into each customer’s terms and ability to compare and track efficacy as well as act quickly if adjustments are needed.
#3 – Enhance Agility to Effectively React to Market Conditions
In a volatile environment, the existing cadence of price review processes may not best serve your company’s changing needs. In the last two years, companies that historically conducted annual or less frequent price reviews found that inflation required them to act more often and more aggressively than they were accustomed to. Many businesses found themselves behind the curve, not prepared to respond quickly enough to account for their cost increases. The same lesson can be applied to volatile markets with changing cost and demand conditions.
In preparation for an uncertain market, more frequent price reviews and measurement will benefit your business in the long term. Companies that update their algorithms to develop analytically driven, statistically rigorous, and near-real-time assessments of pricing dynamics, win/loss rate, and customer willingness to pay are much more likely to capture the value of pricing excellence. Dynamic pricing that is differentiated for customer, product, and market factors, and can be adjusted to meet changes in each of those factors, will serve as an advantage to respond quickly with data-driven pricing decisions.
In addition to more frequent price reviews, some businesses may also need to develop “defensive pricing” strategies that meet the needs of the evolving conditions, while preserving long term value, if they experience true deflation, significant cost reduction, and/or demand decline. A differentiated pricing approach can work in a similar fashion in a defensive pricing environment as it does for price increases.
A good first step toward profitable price management in this scenario is updating customer segmentation to ensure you understand and differentiate your customer landscape based on risk and priority. For example:
- What are your retention strategies for your best customers and what is their risk level? Are the appropriate executives engaged with key customers at the right level? Always communicate, communicate, communicate.
- Who are the prospects you need to convert and win? Is your go-to-market strategy set so you know the core markets and prospects needed to drive profitability? Shift thinking to expand market share and support long-term relationships to meet goals.
Lastly, keep in mind that for many industries and businesses, there is still opportunity right now for traditional price optimization. While inflation is cooling, it is still affecting many markets—and if the past inflationary period left you behind the curve now, you could find yourself in a worse situation when costs do go down and customers ask for deeper discounts. It is imperative to assess your current price management and optimization strategy to identify where there might be merited opportunity to expand margin and position your business for future uncertainty.
Start Preparing with INSIGHT2PROFIT
There is material benefit in preparing for expected market volatility and periods of deflation. Companies do not want to miss out on opportunities due to distraction or risk aversion. Now is the time to get your pricing discipline in order, rather than trying to build it later after the impact has occurred.
Keep in mind that while we may face challenging times ahead, this can also be a period of rapid pricing and product innovation and opportunity. Customers may be more willing to change suppliers, competitors may be weakened, and talent can become much more readily accessible. Because of these nuanced factors, it’s important to not turn reckless in the face of uncertainty, and instead mindfully prepare.
Remember first that the clock is still ticking on the current inflationary environment and there remains an opportunity for many businesses to get or stay ahead of the curve with thoughtful price adjustments now to avoid a worse situation if costs do go down. Second, there is a real danger to companies that are overly focused on cost cutting during difficult market conditions, putting at risk both short-term results that can come from pricing and commercial excellence but also impeding longer-term recovery and acceleration.
Now is the time to prepare for future periods of uncertainty and volatility. There isn’t a one-size-fits-all pricing approach for every business, and your pricing strategy during this time should be proactive, thoughtful, and dynamic enough to shift with the volatility.
INSIGHT2PROFIT can help you prepare to succeed. Our tailor-fit, dynamic pricing solutions are beneficial for such a time as this, leveraging qualitative and quantitative pricing and market-driven data to generate profitable outcomes fit to your unique business challenges. Contact us to learn how we can help you best prepare.