Second, price is all about your customer’s next best alternative. You know, your costs have increased, but your price has gone up. First, pricing has very little to do with your costs. The key to better pricing is one, to consider what the customer’s next best alternatives are. And so come out with a new strategy and maintain it.
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- And once they offer a lower price version, the price point is out there, but customers will ultimately say—gee, I actually think the value of your current price is pretty good, so I’ll stay at the current price.
- They listened to their customers, and in 2009, overall auto sales dropped by 20%.
- And here’s, what’s so fascinating about that strategy.
- And sort of due to uncertainty, a lot of companies aren’t giving financial guidance and they’re really being conservative.
- So, certainly in those industries, there’s the opportunity to capitalize on this higher demand with higher prices.
Price is far more than, you know, sort of a period, a point on the demand curve saying this is the right price. That’s very uncertain about the future and that’s a very challenging time. And sort of due to uncertainty, a lot of companies aren’t giving financial guidance and they’re really being conservative. In this episode of HBR IdeaCast, Mohammed talks with host Curt Nickisch and offers alternative, more effective pricing strategies for uncertain times. Mohammed shares examples of companies across a variety of industries that created effective price strategies in response to the Covid-19 pandemic. Freshbooks’ pricing starts at $1.70 per month.
So, not only you may have an interest in resetting your pricing strategy, but oftentimes what you’re seeing is customers are now starting to demand that you change your pricing strategy. And then at that point, I think there’s an opportunity to sort of reconsider your pricing strategy as well as your prices. Rafi Mohammed, founder of the consulting firm Culture of Profit, says that during a crisis, companies often instinctively slash prices to keep customers—or raise prices to capture sudden demand. But I think more importantly, and I’ve seen this time and time again recently, is that customers are starting to say to two businesses—we still want to do business with you, we just don’t like the way that you price.
Rethink Your Pricing Strategies Amid Economic Uncertainty
So, that’s why the notion of really, you know, not discounting and providing your customers priced-based options is so important. Remember, some of the customers might be very happy to come back and there’s no reason to discount their price. So, what that translates into is, if unless you’re a company like Netflix or Peloton, which is enjoying demand, most companies are facing a weakened consumer. For nearly a century, most auto insurance companies have priced their services in the same way, charging customers an annual premium for unlimited driving. Xero’s define share prices start at $15.00, while closely-ranked Gusto starts at $40.00 plus $6.00 per employee per month. For digital retailers, the ability to revise prices swiftly and on a large scale has emerged as a decisive differentiator—especially during periods of inflation, when prices fluctuate more frequently.
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Rafi Mohammed, founder of the consulting firm Culture of Profit, says a crisis or recession is not the time to panic and slash prices. And that’s a component that most companies don’t do. But two, just as importantly, listen to your customers and see what they’re saying about your pricing. So in 2009, Hyundai rolled out a pricing strategy that, sort of an assurance strategy, that said, if you lose your job, you can return your car to us.
- But you’re also not expecting it to like, bounce back strongly or even recover to the level that it was before for some time.
- First, pricing has very little to do with your costs.
- HBR On Strategy curates the best conversations and case studies with the world’s top business and management experts, to help you unlock new ways of doing business.
- And the customers basically came back and said, look, of course, price is an issue.
- He says leaders should instead reevaluate their pricing strategy—or develop one for the first time—to better respond to customers during the slump and keep them when the economy recovers.
And in the customer’s mind, they can justify that price decrease because they’re saying—oh, they’re giving me a volume discount. And what you’re clearly psychologically communicating to customers is that this is a one-off. But you’re also not expecting it to like, bounce back strongly or even recover to the level that it was before for some time. And what airlines have found, is that over 50% of customers that start at the lowest price end up upgrading to a higher price. And once they offer a lower price version, the price point is out there, but customers will ultimately say—gee, I actually think the value of your current price is pretty good, so I’ll stay at the current price. I just wonder if you should approach pricing the same way or differently when you’re in a situation like this.
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You have big increases in demand and you expect that to be higher after the crisis than it was before. And so I would sort of restrain myself from having higher prices. And then in a couple of months, when people think about coming back, that higher price is going to be in their minds. And so, for most travel-related industries, you know, customers are okay and have accepted the notion of dynamic pricing, that pricing is going to change. What do you think through pricing for a scenario where you think you may have higher demand than you had before?
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That’s an incredible example of a company that listens to its customers and creates a pricing strategy to solve what their true needs were. So, certainly in those industries, there’s the opportunity to capitalize on this higher demand with higher prices. And so, that’s really important because once you set a low price, it’s very hard to recover when demand eventually does come back. So, it’s good to have that price point out and some people will take it, but oftentimes having a good version will highlight the value of your other products of your better and best products. And here’s, what’s really interesting, is that, in a recession, oftentimes people say—I want a lower price but, I’ve been involved with many pricing strategies where my client has been in that situation.
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But it’s not necessarily always about—you don’t always have to offer a discount. Can you raise the price and also communicate that that’s going to be temporary, what is sales but just communicate that this is sort of what’s needed to keep the lights on at the moment? And so you have to be cognizant of that and offer them choice, and offering them new types of entrees, and really understand them, and provide a product version that is for price sensitive people. So, let’s say you’re in the financial services industry and you said, low price. But it’s really important to set a metric about when your price is going to go back up.
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It’s because we don’t like the strategy that you’re using. Still, to like, set your prices and think through these creative things at a time of flux. Perhaps offering a best version— okay —to capitalize on that demand, but I wouldn’t increase prices.
And while it seems counterintuitive, especially during a recession, sometimes offering a best product is actually very good. Many airlines have come out with a basic economy type of seating, which, you know, you don’t get any advanced seats. Pricing is really going to be key during these very challenging times for consumers. Since their conversation took place in 2020, the crisis you’ll hear them referring to is—obviously—the Covid-19 pandemic. HBR On Strategy curates the best conversations and case studies with the world’s top business and management experts, to help notes payable you unlock new ways of doing business.
But, and it’s really important in those cases to communicate it. And you know, your clients who are coming in, they might be, they don’t have as much money in their pocket as they did before the virus hit. And not to mention the, you know, lower density, possibly these restaurants or the extra cleaning and expenses that they have, or additional people that they have to hire to handle safe service. You can say—look, I’m willing to give you a low price, but when your stock price reaches X, then we’re going to go back to the, to the higher price. You have to buy four movie tickets, but you get a low price. You’ll get a lower price if you donate to a charity.
How do you think about it if you’re in that enviable position? And I’m sure the moment that they reopen, there’s going to be lines out the door, socially-distanced lines, of course. And, for instance, there’s a famous ice cream place, very close to me. And so my favorite hotel in the Caribbean, I’d say during the summer, is one fifth, the price of what it is during the winter. That’s where businesses have taken a hit short-term, but they expect it to bounce back and perhaps even exceed what they had before. And be very clear with customers—this is why we’re doing this.
While Freshbooks is a slightly more popular option for small businesses, Xero bookkeeping is more robust and preferred by larger accounting teams. Xero accounting software is a cloud-based solution for small to medium-sized businesses. Xero’s pricing ranges from $15.00 to $78.00 per month, depending on the plan that you choose.
And I’m sure they could raise their prices, but people remember that price. And so, yeah, I get that there’s higher demand, but you’re in it for the long run. And certainly some restaurants will have to raise prices `cause it just doesn’t make sense for them financially to be in business due to increased cost and reduced table seating.
McKinsey did a study and they found that a 1% increase in price, if demand is held constant, would on average increase operating profits by 8.7%. And the customers basically came back and said, look, of course, price is an issue. And Hyundai actually took the time to listen to their customers. And a lot of companies are approaching sort of the reopening as a time to reset. As you’ve intoned, pricing is something that management struggle with all the time.
And how do you get the gumption to say, you know, we really need to analyze this and try out a different pricing strategy at a time when it feels like it’s easy to be risk averse? But however, for other types of industries, yeah, sure there’s a pent up demand, but if you raise prices, people remember prices. And finally, what I’ve seen is that sometimes clients, businesses will discount prices because they want us to show a client that they’re a partner, that they’re in it with them during this, during the long run. He says leaders should instead reevaluate their pricing strategy—or develop one for the first time—to better respond to customers during the slump and keep them when the economy recovers. But, for companies that are sort of thinking about their pricing strategy, one of the easiest things for them to do is to scrutinize the discounts that they offer.
However, retailers that use such simple heuristics miss significant opportunities because they fail to tailor their responses to product availability and demand, among other factors. While you’re there, be sure to leave us a review. So, if I’m in the middle of central park, it’s about the rain.
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