How To Respond To Increasing Price Pressure 🛒
Making fully informed pricing decisions daily is by no means easy, especially when the business is faced with mounting price pressure from competitors and/or customers are demanding more discounts and rebates.
When the economy is in a downturn, it is not uncommon to find, for example, that your competitors slash prices to maintain share or volume forcing, in turn, the rest of the market into a negative price cycle via price wars.
The problem is though, increase prices too much as a result of price pressure from competitors and lose volume and share; or give away margin as a result of excessive discounting and lose your hard revenue and profit.
We ask: What is the best price action to take when faced with growing price pressure?
The answer is not simple. The global crisis has changed customers’ perceptions of value and price. Price pressure is now an everyday reality for suppliers. Now, more than ever, customers and end consumers are cautious buyers. The economic downturn has created a tight spending environment for customers. Customers are closely watching what they are spending and how much things cost. What’s more, they are asking their suppliers to justify their prices or else reduce them.
In light of intensifying price competition across most industries now, in this article, we will continue to discuss price pressure and how to deal with it from a pricing perspective. We will share the three biggest price mistakes companies often make when faced with intense price pressure – whether with competitors or perceived. By the end of this article, you’ll know where the greatest source of price pressure comes from and how to avoid margin erosion.
Table of Contents:
I. Price Pressure: How To Respond to Increasing Price Pressure
II. Price Pressure: Is Stress A Problem In The Pricing Community?
How To Respond To Increasing Price Pressure
When businesses face pricing pressure, cutting prices to maintain market share is often the first price action made. However, most of the time, it is not the right solution.
3 Major Oversights of Companies When Facing Price Pressure
Cutting prices often feels right when competitors are slashing their prices. However, many pricing managers advise against excessive discounting to survive a price war or deal with aggressive procurement teams.
Let’s take a look at the three big mistakes pricing managers have lived and breathed (but regretted) when faced with intense price pressure. Followed by some expert pricing tips to avoid giving away your hard-earned margin during times of intense competition.
1. Blanket price rises
Blanket price rises are definitely something to avoid in bad and good economic times. Don’t do it. Blanket price rises are basically when a business applies a fixed percentage increase across all SKUs – without any price variations across SKUs.
Firms continue to apply blanket price rises simply because it’s far easier to do this and get an instant revenue boost than optimising prices across the portfolio. In effect, simple price rises are easy to do and the math is easy.
However, just because it’s easy, doesn’t make it an effective or safe price action. In fact, it is highly likely that you’ll find yourself giving back all the revenue you made in credit notes and discounts. Customers will and do push back on poorly managed and calculated price rises. Therefore, it is significant that you plan and apply carefully thought through price increases – i.e., strategic price increase. You want to examine your portfolio carefully – understand the elasticities for each product. Yes, this may be harder, but you need to analyse price and volume data carefully to then determine the appropriate categories and sub-categories to optimise.
2. Cost-cutting when you can’t raise prices
Cutting costs is not a viable solution to decreasing growth and revenue opportunities. You must always be on the lookout for white space opportunities as even in a downturn new pricing opportunities emerge. The job of a good pricing team is to identify them and translate growth into real profit dollars. For example, the loss of human capital because of downsizing can cause further damage to innovation. Not only that but it will also eventually cause loss of sales. The right solution should be to increase perceived value, and not cut costs.
3. Forgetting value
Studies reveal that 72% of all new products fail because companies continue to under-resource key pricing and marketing initiates – or worse still don’t even recognise that pricing is a burning platform for them. For businesses to overcome intense price pressure, they need to step back and understand the total economic value at their deposal. This means considering value right from the start of the product launching. Applying a more sophisticated price-setting approach to all new product pricing. And then monitoring and tweaking price continuously until you have delivered the full ROI from pricing and your new product innovation strategy.
What are the sources of pricing pressure?
Price pressure, then, comes from various sources. The top five are as follows:
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Low-cost rivals
The success of low-cost competitors usually comes from their redesign of the value chain that allows them to considerably cut costs in a traditional market. Low-cost competitors always choose strategies that provide lower costs and their ability to cut costs increases the difficulty for bigger, less flexible businesses to respond.
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Strength of a Currency
A strong currency makes exports and also the home country’s goods more expensive for other countries. The value of foreign sales is also decreased upon converting it back into home currency. Consequently, the home country’s prices are forced downward so that companies can remain competitive globally. Majority of the firms would be impacted by a strong home currency since the economy nowadays is more global than ever.
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The rise of Emerging Markets Multinationals (EMM)
New entrants in the market now constitute a significant shift in the world economy. An example of a newcomer is the EMM (Emerging Markets Multinationals), a company established in an emerging market country, competing internationally. Mostly, these new challengers enjoy cost-based and location-based benefits. Therefore, they own some price power allowing them to play havoc on markets through price competition. Although not all, most of these newcomers are low-cost rivals that can challenge incumbents on prices.
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Changes or revisions in the country’s laws/policies
Changes in a country’s laws/policies may also affect prices. For example, China’s central bank’s decision to devalue its tightly-controlled currency in August 2015 improved and helped China’s exports and Chinese firms in the whole world. Since China is focused on leading high-quality and value-added manufacturing power by 2049, the central bank’s decision heightened the pricing pressure on both low-cost and high-value manufacturing products.
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Changes in consumers’ buying behaviour
Customer responses to price change when there’s significant downward pressure on prices. For example, customers are much more informed on price than ever before. Customers expect clear and transparent prices. They say they prefer standardised universal experiences and are more sceptical of brands. And more open to value for money offers and new products that give them what they want. Nonetheless, they are not the biggest source of pressure because they are divided into two types: those who buy based on prices and those who purchase based on the value of the offerings.
Implications
- In the long-term, a business should rethink its strategy so as to maintain its profitability, market shares and even its competitiveness. Depending on the situation faced, there are several different actions and strategies that can be developed.
- The effect of pricing pressure on an organisation depends on the actions taken up to defeat the competition. If appropriate, these responses can lessen the damage from the price pressure.
- In reality, and you can’t always win every customer profitably because you don’t always have pricing power and or a competitive advantage. However, you should always be able to fight and survive. Price pressures are not likely to decrease but by knowing how to quantify value in terms of real profit dollars for the business and your customers’ business, you will be prepared to respond to, “your price is too high” from customers.
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Conclusion
The unparalleled pressure to reduce prices as a result of difficult mix of market forces is yet another reminder to invest in your organisational pricing capability.
Key elements to remember along the way are:
- Don’t get caught red-handed
- Don’t wait for new challengers to beat you
- Don’t’ respond without a plan (Create a robust plan of action)
- Don’t focus only on present competitors and products/services
- Don’t fail to notice traditional competitors
- Don’t act on price-cutting only
- Don’t misjudge the range of the change management needed
To navigate through intense price pressure in the best way possible, businesses may need to rethink their corporate strategy to ensure it’s still relevant in the market. But also it is important to define a roadmap for pricing and margin maximisation which enables everyone in the business to understand the vision for change, work together and then execute strategy in the market quickly.
Price pressure can and will create stress and anxiety for pricing and commercial departments (as we discuss in the next article). However, having a roadmap in place to guide the business through times of intense competition or uncertainty will ensure that the business remains focused on what’s important: i.e., generating value for the business and their customers.
Price Pressure: Is Stress A Problem In The Pricing Community?
Whether it’s dealing with price rise mismanagement, waiting to present alternative pricing options to cost-plus minded stakeholders… Or giving difficult performance feedback to your team, most pricing executives experience acute moments of stress at some time or another and not just from customer price pressure.
You know the feeling. Your heart starts to pound, your mouth dries up, and you breathe more quickly. Then your muscles tense, you have butterflies in the stomach and you may start to shake. This is a growing issue across the developed world and not just in pricing jobs.
These physical responses to stress are quite useful if you’re running away from a giant crocodile or procurement officer. However, for many “stressful” pricing situations, these bodily reactions are not only unhelpful. But they can be quite destructive and block better ways of handling difficult pricing and team situations. Especially as many stressful pricing triggers have no immediate physical release or resolution.
Stress in the pricing community is common. If you feel stressed, then you are probably doing your job correctly. But what does stressed-out look like and why is it such a problem in the pricing community?
In this article, we will talk about a more emotional type of price pressure and how it is affecting the pricing community. We will also discuss how pricing executives respond to stress. By the end of this article, we will provide you with some tips for handling stressful pricing roles and situations.
Price pressure: Pricing executives have two responses to stress
The definition of stress describes any demand that is placed on the body, whether it is mental or physical. We tend to think of stress as being a negative experience. However, there is a big difference in being stressed and stressed out.
According to the latest stress research, there is a clear distinction between good stress (eustress) and bad stress (distress). Research suggests, for example, that any challenge or change is a form of stress. Often this can be something that is fun and enjoyable, something that makes us feel alert, excited and driven.
Naturally, there are big individual differences in how we react to different business situations. Whether they lead to eustress or are just simply distressing. For a pricing manager tasked with delivering effective analytics to stakeholders on a timely basis is a dream come true. A chance to demonstrate their analytical thinking and knowledge to achieve complex business outcomes. Whereas, another might feel physically sick at the thought of explaining their pricing logic and price models. Especially in front of a crowd of sceptical stakeholders and sales teams.
Pricing managers and their teams tend to differ hugely in the amount of challenge or change that they can comfortably deal with.
Ask yourself: Are you someone who seeks out change by championing a better way of pricing (and to the toughest of audiences and customers)? Or do you prefer to sit behind your desk and hypothesis? Contemplate on pricing options within the confines of well-known, traditional financial/accountancy-based (and often broken) paradigms? Do you find that a little nervousness can help you in big meetings/negotiations, or do you go to pieces?
We have conducted a series of empirical studies on pricing teams and culture and conclude that each pricing manager and analyst has their own optimum level of performance and pricing pressure; anything below that means they are not driven enough, while anything too far above means they simply get too anxious to the point of not being capable of performing.
This stress effect is quite common in pricing teams and is known as the Yerkes-Dodson Law. This law is a good way to explain why some pricing executives thrive during pricing transformations while others cannot bear the anxiety of changing operating models, systems, processes or looming deadlines.
Stress, whether it is good or bad, is one of the most real examples of the connection between individual pricing potential and actual pricing performance. Just thinking about an upcoming contract negotiation or a pricing committee meeting, for example, is enough to cause many pricing executives that familiar “butterflies in the stomach” feeling.
Stress triggers come in all shapes and sizes for the pricing executives: some pricing situations require an immediate reaction or decision (people management and/or tactical pricing decisions driven by increasing competitive pressure); others present more ongoing challenges and a more prolonged response (such as leading people effectively through a wider business transformation driven by technological advancements).
Luckily, most pricing leaders and teams can identify different types of stress triggers affecting their thinking and performance. Unfortunately, the majority of pricing executives are still struggling with how to manage these stressful triggers. As a result, there are a lot of stressed-out pricing executives out there suffering sleepless nights, poor health, disengagement, poor focus, mistakes and underperformance – and all because of stress and not knowing how to deal with it properly.
Implications
Some top tips for handling stressful pricing roles and situations:
The all-important thing is for us not to stay in that “red-alert” or hyper-stressed-out state for too long. Pricing managers would benefit from finding ways to return to their natural level. We cannot always remove a stress trigger, but there are many effective steps we can take to reduce the physical and mental effects: For some, it may be as simple as closing our eyes and taking deep breathes in and out. For others, it may mean taking a gentle walk through the park or even yoga and meditation. All of these things show to significantly reduce the physical response of stress at work.
An alternative approach to stress management is seeking support on changing your view of work, pricing and even how to achieve results. We treat something as a stressful trigger only if we perceive it to be one in the first place. Re-framing a situation can be very helpful to your pricing career, health and life in general.
A final simple and practical solution is to respond to the fight-or-flight pang of electric stress we can feel in the moment by regular exercise: Go and expend all the additional energy and resources that your body has generously given you and fight stress swimming, surfing or even walking on Australia’s radiant beaches and shorelines. Your job is to deal with price pressure – but you need to leave the office stress behind you in the evening.
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Conclusion
Stress (good or bad) is one of the examples of the connection between individual pricing potential and actual pricing performance.
Each pricing manager/analyst has its own optimal level of performance and pricing pressure. Meaning, below that level, shows that they are not driven enough. On the other hand, above that level indicates underperformance because they get too anxious.
Regrettably, most pricing executives are still having difficulties managing these stressful triggers. Thus, most of them are suffering from sleepless nights, poor health, disengagement, poor focus, mistakes and underperformance. All because of stress and not knowing how to properly deal with it.
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