Responsible, Agile Pricing for the Coronavirus Crisis



In this video (the second of a three-part series), Valerie Howard interviews Craig Zawada, the Chief Visionary Officer at PROS and author of the Price Advantage, on why it’s so important that businesses maintain discipline in their price strategy through the COVID-19 outbreak. You’ll hear Craig’s perspective on why you really need to pay attention to your customers’ changing perceptions of value and some examples of businesses who have done so effectively. You’ll receive practical advice for supporting your sales teams which may be inundated with request for discounts and price reductions during downturns like this. Finally, Craig provides thoughtful inspiration on why pricing organizations are so vital to a company’s resilience through these challenging times.

Other resources on how to navigate disruption through COVID-19:

Highlights 

[00:27]: Valerie offers a quick review of our first conversation.
[01:03]: Craig shares why a drop in demand shouldn’t drive an immediate price decrease.
[03:12]: Valerie and Craig discuss how work stoppages are affecting the supply chain. 
[04:40]: Craig points out the situations that would drive a need to quickly, dynamically adjust pricing.
[08:42]: Craig provides three keys to supporting sales people on the front lines facing the onslaught of discount requests from their customers.
[10:54]: Recommendations on the key price governance measurements.
[12:47]: Craig reminds us why pricing teams are so vital to businesses in volatile markets and shares his call to action.

Full Transcript:

Valerie Howard: All right, so today it's Friday, March 27th and we're several weeks into the COVID-19 crisis. We're thankful that we have Craig Zawada here today joining us to share his advice on pricing through downturns and unprecedented scenarios like today. Craig is the Chief Visionary Officer at PROS and he's the author of one of the most renowned books on pricing, The Price Advantage....

Valerie: Last week, Craig, you offered us some advice to this audience on what actions we can take in the short term and the long term to address what's going on in this coronavirus crisis. One of those key pieces was short term advice was to not employ panic pricing, not to over discount and just drop prices when there's a lack of demand. Can you share more about your perspective on why it's so important to protect pricing through a crisis like the one that we're facing today?

Craig Zawada: Sure Valerie, and I'll start with understanding that in this environment it's important to recognize that the current situation is a shift in the demand curve and it's not necessarily a change in your position in the market. And that's very important to understand in terms of determining your response to this crisis.

Craig Zawada: If you look at most categories, you aren't necessarily going to create more demand by lowering price. Most categories are inelastic in creating new demand, at least in the short term, from a drop in price. So if you do that, if you do drop price, you're either going to steal it from future purchases, you may start a price war with your competitors and you also very importantly, may lower the price expectations of your product or services permanently. We know by research that it's much harder to raise prices in the future then is to lower prices and so an unintended consequence is you can devalue your brand by lowering price.

Craig Zawada: Now this is in contrast... you have some categories where you actually can increase demand. The classic example is soft drinks. If you lower price, people will pantry load and they'll actually drink more. But if you're an example of a tool company, if you lower price, people may not necessarily buy more tools. It's very important understand that this environment is a shift in the demand curve, not necessarily your position in the demand curve.

Craig Zawada: The other reason is there have also been shifts in the supply curve for many industries. Many industries are having difficulty in producing supply for the market, so while there may be a shift in demand curve, there may be less available as well, so there may not be the need to unnecessarily reduce your prices in this market.

Valerie Howard: Can you give us some examples of some of those areas where maybe the supply chain has been affected in such a way that it's changing that demand outlook?

Craig Zawada: Yeah, so I mean there are a lot of examples in industrial and high tech equipment, for example, where a supply has come from Asia and a lot of that supply has been difficult. I talked to one company this week and they're about six weeks behind in the supply. There's not available components to make the product. They know they're going to be... have not supply available and likely their competitors as well. I think particularly companies that have been sourcing from Asia, but also given the work stoppages, the furloughs that have been happening, production isn't happening with a lot of companies. That's going to create an environment in a lot of categories where you don't have the supply available.

Valerie Howard: Makes a lot of sense. You're talking about protecting your price in these situations where maybe demand has stopped or has declined, but how can you effectively ensure that your price is still market relevant when demand has taken the steep dive and that it's not just an unrealistic price?

Craig Zawada: Yeah. And I think that's a great question because like I mentioned, it's we're facing really a demand crisis right now. And in most cases, you haven't changed your position, competitive position, in the market. However, there are cases that I think you have to be particularly careful around and really understand.

Craig Zawada: For example, oil prices are very low. If you're in a market where it's heavily dependent on your cost based on oil prices, for example, plastics, high intensity direct relevance chemicals to oil prices, well if you're not changing your prices accordingly, where your competitors have, you actually could have changed your competitive position.

Craig Zawada: I know in pricing, most pricing organizations, what they do is they're quick to react when supply prices have gone up, so they'll change their prices accordingly and they put in barriers to reduce prices quickly. They want to kind of benefit to give the market time and understand the market response to those prices that are going down, the input prices. In this environment, you may have to be quicker to respond to that. You may have to respond more quickly as your input costs are going down in those environments where you have dramatic changes in the supply costs going down. I think that's one area that's very important.

Craig Zawada: The other is to make sure that you're relevant. And I mentioned this in the last video that we did about seeing where customers have changed their benefit, what they benefit from your product. And I gave the example in the last video of 2008, 2009 the auto makers, instead of lowering price, they moved to 0% financing, and so they were able to sort of resuscitate demand by moving to 0% financing. And you actually saw that this week. GM and Ford, they moved to 84 months, 0% financing, which is an awesome deal.

Craig Zawada: And so what you find in these environments, in volatile environments, is often you have changes in what customers value. They value something differently. You want to make sure that you're on top of that and change your price structure and your offering to make sure you're relevant in this market. It could be on the financing side. It could be in the shipping options that you have, the order size quantities. This environment, customers may want to buy more because they're worried about supply. They may want to buy less. Understanding what are the components that they value.

Craig Zawada: And I'll give you an example of this. There was a plastics company that they had two products that, two plastics, that perform the same function. One of them was fast drying. When their buyers put it through their manufacturing process, it dried very quickly. And because their customers were running at full capacity, there was high value for that. But as their customers moved to more slowing in their production, they didn't need that fast drying. They actually preferred the lower price, slow drying product. And so the point is that understanding what are some of those changes and benefits. Don't necessarily lower the price of the slow drying one because actually there's more demand for that. That's where this environment is very important to really take stock of how have the customer's economics changed? What do they value differently? And how can you respond with your total offering, not necessarily price, but your total offering to respond to that?

Valerie Howard: I really liked that point. Thinking about the different levers maybe beyond the price that are meaningful for the customer. I know you've sent me some research about how in these conditions customers may not be willing to pay as much and maybe you can restructure that as perhaps locking in that customer for a longer term contract. Sounds a little bit like maybe GM's offering that with 84 month contracts and then also maybe sizing down products as well. Is that something that's typically offered?

Craig Zawada: Yeah. Yeah, and I think it's really understanding what are your customer's economics, what are their preferences, how would they changed and how can you make sure your pricing approach can adjust to that.

Valerie Howard: When it comes to enabling salespeople, for pricing, with these various levers, what is your recommendation on helping the sales team in maintaining the discipline on pricing when they are facing these volatile conditions, they're trying to empathize with their customers who may be face thing lack of demand on their own side?

Craig Zawada: Yeah, so Valerie, I would say I would have three recommendations in this case and we've found this from other highly dynamic environments, downturns in the past is first is to make sure that you do have the proper governance. You want to make sure that there's not a knee jerk reaction out in... especially when you have pricing decisions that are made in a distributed fashion within your company. Making sure that you have that tight governance around approvals is very important.

Craig Zawada: Second is to track it. Understand what's happening. And a lot of pricing organizations, they'll look at stuff monthly or quarterly. I mean this needs to be done very, almost real time to understand what's happening, to really make sure that unnecessary discounts aren't given, that there's proper controls in place.

Craig Zawada: And then the last point is to preempt it with a plan because all of our customers, all companies are going to be faced with lots of asks by their customers for doing something. It's important to preempt that with a plan. And I like to think about it as a cascading discount. If you are going to give something, make sure you have a plan. Are you going to give it or not? Or if you do give it, what do you get in return for that? If I'm going to give a longer payment terms, because there's uncertainty or lack of cashflow on the part of my customers, what am I going to get into that? Could be I want testimonials, I want something in return to that, because if you find you're in a position where you do have to give something in terms of your terms and conditions, you want to make sure that you get something for that in return. Coming up with a proactive plan to be able to respond to this is incredibly important to make sure that you have that discipline.

Valerie Howard: That's wonderfully helpful. I guess could you share with us maybe some of the ways in which you recommend measuring that governance with your sales teams? Or are there certain metrics that you recommend that pricing teams look at when it comes to working with sales on this?

Craig Zawada: Yeah, I think the two things, the one, which is obvious, is the discount level. What are the discounts or exceptions that are given? Most companies will have some except and tracking discounts that are given. But it's very important in this point, most pricing professionals know the idea of the price waterfall, so what matters is not just the list price or the discounted price, it's all of the discounts, terms and conditions that happen after. And in this environment, it's incredibly important to have a read on all of those things that are happening to make sure that it's... because what matters is what's the pocket price, what's the pocket margin after all of those things and you want to make sure that it's not just the negotiated discount, it's all of the terms and conditions are tracked. So having a really a close view on all of those things, all of the elements of the price waterfall is incredibly important during this time.

Valerie Howard: Absolutely. I actually had a conversation with one of our medical manufacturer clients just a couple of weeks ago on how they use the price waterfall and how it's so powerful for them in taking a look at some of those levers to some of the services that they offer and helping them to make sure they're holding price integrity for the company. Any final points on managing discipline on the front lines for conditions like the coronavirus crisis we're facing today?

Craig Zawada: I think the thought that I'd leave with you is now is the time to really step up as pricing professionals. The role of a pricing professional during this time is incredibly important. And I think it's a point where this will further allow companies to differentiate those that have the good discipline, that follow the good practices to really stand apart from the competition versus those that maybe are unprepared and do more knee jerk reactions. I think it's an important time for pricing professionals to really go after and apply the discipline that they've learned over the years around the discipline of pricing.

Valerie Howard: That makes great sense. Thanks so much for this advice, Craig. It's really helpful to all of us in this time of need. For our viewers, we hope this information has been useful for you as well. Should you have more price strategy questions concerning today's unprecedented conditions, we're here to support you. Reach out at the link posted below, and we'll connect you to an expert who can answer your questions. Thanks so much for joining us.

Craig Zawada: Thanks Valerie.

Valerie Howard: Thanks Craig

About the Author

Craig Zawada

Craig is responsible for creating the vision for how PROS uses data and technology to help companies drive their business strategy. A widely published author, Zawada is perhaps best well known for co-authoring The Price Advantage, which has been recognized as one of the most pragmatic books available on pricing strategy. Prior to joining PROS, he was a partner and leader in the Marketing and Sales Practice at McKinsey & Company.

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