It’s About the Strategy Stupid

As Reed so simply put it, you can’t price your way out of a recession.  Too many firms have gotten caught flat-footed and are using price discounts in a panic to try to keep demand that is going away no matter what they do.  The firms that do this are creating two very significant long-term problems.  First, they are destroying the integrity of their pricing and the value of their brands.  Second, they are training their customers to negotiate for every last penny thus undermining their most valuable asset – trusting customer relationships.  Both of these forces will make it extraordinarily difficult to bring prices back up when the economy finally does turn around.  In addition, it will take much longer to bring prices back up to a level that reflects the true value of the goods and services being sold.

The way around this is to look objectively at pricing as a strategic tool that must be managed systematically based on value, market demand, cost structure, product lifecycle, and firm capabilities.  This view leads one to make decisions on the basis of preserving and gaining pricing power – be it through reducing capacity to match demand, introducing low price – low value offerings, or making systematic adjustments to prices lists so that list and street prices are more in line.

Two weeks ago we spoke with one of the most capable pricers that we know about how he is getting through these times – “Fred.”  He is thinking strategically.  What has he done?  First he recognized that much of the incremental revenues that had come from pricing last year were going to disappear this year.  Next he engaged with his CEO and they came up with a plan to reduce capacity to well below current demand levels.  This creates pricing power and protects them against further downside risk from collapsing demand.  It also paved the way for passing through a 20% price increase to their least profitable accounts.  Some accounts will walk away – that’s ok because there isn’t enough capacity to serve them any more.  The others will take the increase because they value the service that they get.  And Fred’s firm has now set the stage for a stronger recovery by enforcing a pricing strategy.

Clever pricing tactics and working the “price waterfall” are necessary but woefully insufficient for these times.  The firms that understand that pricing is all about strategy will come through these tough times stronger and more formidable competitors.  Those that don’t will be lucky to survive.