What Can Businesses Do When Customers Demand Price Cuts? ✂️
Costs do not stay high permanently. Sooner or later, customers will demand price reductions. Businesses must exercise extreme caution when this happens. Price undercutting, when done incorrectly, can harm the brand’s reputation and decrease profitability. Your customers will most likely be pleased if you agree to cut your prices. But in the long run, lowering prices may cause customers to develop low expectations and disengagement. A tricky position: Is your company ready to deal with price reduction requests?
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At Taylor Wells, we argue that businesses can strike a balance between executing targeted price cuts and retaining profit margins. We believe that price reductions must be approached by taking into account specific customer value drivers for different products and segments. By the end, you will learn how to prevent taking a loss in the face of price decrease requests.
In this article, we will guide you through preparing and handling price reduction requests from customers using value-based approaches in strategic pricing, marketing, branding, and organisational structures.
Table of Contents:
I. 5 Ways Businesses Can Strengthen Commercial Capability When Customers Demand Price Reduction
II. Does Your Sales Team Use Price Reduction to Meet Volume Targets?
5 Ways Businesses Can Strengthen Commercial Capability When Customers Demand Price Reduction
Price rises to combat inflationary pressure are widespread across industries. But everyone knows that commodity, raw material, and labour costs are never excessively high for an extended period. Including your customers. So, it’s inevitable that your customers will ask you to cut your prices in line with cost changes. What do you do?
You have to think and behave differently as a business and build and embed commercial capability. Consider the following:
1. Mobilise your teams.
Establish a team comprised of procurement, R&D, supply chain, and finance to gain a thorough understanding of your supply chain and enhance your raw materials mix. This is essential for calculating a low-cost pass-through lag.
Ensure everyone is on the same page and ready to act when necessary. What’s the best approach to managing diverse teams? Foster team collaboration and data-driven decision-making.
We believe teams can gain ground quickly even in today’s tough business landscape if pricing, operations and procurement teams learn to collaborate better using real-time data on tens of millions of transactions.
With new tools and approaches, they can gain a deeper understanding of margin risk, translate it into clear pricing priorities, and incorporate details about commodity costs and critical customer value drivers into conversations with customers.
2. Make the best out of your data.
By providing insights into customer behaviour or market conditions before they occur, data helps teams to predict trends, recognise opportunities, and stay ahead of the competition. Data is essential for a business’s growth and success.
Your organisation must make informed judgments based on factual information rather than educated assumptions or gut feelings. For example, utilise data to link cost, supply chain, and pricing. Understand cost throughout the supply chain and cost mix so that you can provide data-driven responses when customers request a price reduction.
Teams should also learn to use dashboards to gain real-time insights into a range of vital topics: customer-level performance and the sources of margin leakage; sales-rep performance to identify development needs and coaching opportunities; and tracking fundamental price levers to monitor margin maximisation — such as freight, small orders, price floor and target pricing realisation rates, discounting, overrides, cost pass-through (as mentioned above).
3. Implement your price reduction strategy.
Strategic value-based pricing is unquestionably a powerful tool when it comes to price-cut requests. Remember, it’s not smart to have across-the-board markdowns. When deciding whether and how much to cut prices, use a value-based approach. Consider value maps and customer value models to manage your discounts.
Identify which products and services your customers are more price sensitive. Reduced prices for certain items can help you grow sales and customer base. If you make the effort to establish a successful price reduction strategy, it will have an immediate and long-term effect.
Nevertheless, product attributes and value drivers relating to services or total economic value are the primary reasons why buyers buy from the business. Concentrate on the aspects that make your product or service valuable. Be aware of the competition and show why customers should pick you instead.
4. Ensure effective pricing communication.
After you’ve acquired data and made decisions based on it, the next step is to communicate it to your teams. Then figure out how to notify your customers about it.
Will you agree to their price reduction requests? If so, you should have enough data to show that the advantages outweigh the risks. If not, tell your customers and make them understand that there is a good balance between the value of your products and services and the prices you set.
Effectively communicating a price is just as important as outlining your company’s overall pricing strategy. What good is competitive pricing if your customers don’t see its worth? Pricing communication should support your selected pricing strategy, as it is critical to a company’s profit.
When discussing pricing, for example, you should comprehend buyer psychology. One of the determinants of value is price. Customers who believe they are receiving good value for money will remain loyal no matter what prices you set.
Communicate your objectives to your organisation, particularly your sales teams in a strategic, transparent, and trustworthy fashion. This allows you to avoid conflicts and anticipate reactions.
5. Respond to customer and sales team concerns and encourage feedback.
Feedback is valuable because it serves as a guiding force for your company’s progress. As an organisation, you want to know what you’re doing right (and wrong). You have two valuable sources of feedback: your sales team and your customers.
When interacting with customers, your sales force is frequently on the front lines. And they are in charge of finishing the deals. Thus, their insights and experience are extremely valuable. What are the challenges they experience in communicating the features of your products? Assess, for example, how they understand and explain the value of what they are selling.
Listening to your sales team is essential for providing good training. It aids in the breakup of harmful habits, reinforces excellent conduct, and allows teams to work more efficiently towards their objectives.
On another hand, you have customer feedback. This is information, thoughts, problems, and suggestions offered by your customers regarding their interactions with your business, products, or services. Like sales team feedback, it also informs enhancements that can help any firm achieve positive change.
Customer relationships will always be vital no matter what price approach you decide to use. Respond to the concerns of your customers in a fair and timely manner to avoid upsetting them. The way you are treating them is critical in gaining their favour when costs and prices rise in the future.
Discussion on Implementing A Price Reduction
In today’s extremely competitive market, we constantly hear comments like, “Your prices are too high, is it possible to lower them?” These requests will only worsen if customers realise that costs are beginning to fall.
Accepting their requests may appear to be an easy way out, but it reduces your profit margins. As previously said, you should establish value-based strategic pricing and organisational culture. If the customer believes it is valuable, they will pay for it.
Strategic pricing is the purposeful creation of conditions that will lead to better and more profitable pricing results. It combines price best practices and assures that your pricing strategies and analytics support your overall business model.
It’s crucial to keep a watch on your competition, but keep in mind that they aren’t the ones buying your product, and they may be committing pricing errors. Instead, recognise what your clients value and charge them appropriately. You may immediately capture customer value and convert it into shareholder value by developing strategic pricing policies, analytics, and procedures.
This, however, is impossible to do unless you have a dedicated team working on it. Hence, your organisational structure is equally significant. While fostering a positive working culture will be challenging, a bad culture will only result in long-term adverse consequences.
It should come as no surprise that when people are pleased and content with their jobs, they work harder. You can boost your staff productivity and thus overall work production by developing a strong business culture that is aligned with your company vision. Moreover, the better your work culture, the richer your brand identity. All with no additional encouragement, your employees may become brand ambassadors.
Implications of A Price Reduction
The reality is that economies are slowing down. To manage constant business uncertainty, companies must develop costing and pricing capabilities to optimise prices to changing conditions and markets. Don’t just go with your gut instinct. Power up your pricing teams to secure value for both the company and its customers.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Make use of data. While artificial intelligence will never be able to outperform humans in pricing decisions, it can be a huge help when used correctly. For example, valuable data insights can help company executives and data experts communicate value more effectively with each other and with customers. Data facilitates the verification of pricing opportunities and restrictions.
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Conclusion
While price cuts may be the first thing that comes to mind as costs begin to fall, price reduction requests from customers should be handled with caution. If not, it might have long-term negative consequences for your brand and revenue.
Encourage collaborations and empower your team. You will have stronger insights to guide your decisions and strategy development. Utilise data analytics to boost your reasoning. This combination allows for strategic pricing.
Then, of course, understand your customer psychology in order to explain the value of your pricing offerings more effectively. Finally, be open to feedback. We don’t always get it perfect on the first or second try. However, sales teams and customers can provide useful insights.
Requests for price reductions can be overwhelming. You must maintain profit margins while simultaneously satisfying your clients. The answer to resolving this difficult issue is a value-based customer-centric organisational change that results in the best price performance.
Does Your Sales Team Use Price Reduction to Meet Volume Targets?
Price reduction is a great way to shift stock and achieve volume targets. Yet, excessive discounting at the line level eats away margins and destroys profitability in the long run. Taylor Wells discusses some simple tricks of changing entrenched discounting habits in under a month (with a new pricing system) and beyond.
The pandemic has changed the game for businesses, creating a divide between essential and non-essential services. It has developed a major imbalance for demand and supply across all industries.
Over the past few years, successful pricing executives have been quietly putting together a pricing toolkit that reduces sales’ dependency on discounting to drive volume. Like any decision and changes that you’ll make for your business, it isn’t simply done on a whim. Rather, it should be planned well in advance. Similarly, when creating sales promotion activities, it’s best to use a price reduction calculator.
Building a world-class pricing team
A pricing toolkit includes low invasive and long-lasting strategies in organisational behaviour and best practice price management interventions. At the heart of these interventions is “mental unblocking.” This simply removes psychological barriers that keep people stuck in damaging thought patterns and behaviour.
Often, a company’s ability to drive profit is measured by who is on the team and how it functions. Pricing policies, organisational design, and team capability are key success factors. Teams that are invested in addressing skill gaps, team members, strategies, and operations generate more revenue than companies that ignore these key result areas.
This may seem pretty simple though. But it can be very hard to get pricing and sales teams to work together. It’s even more difficult to alter how sales teams view pricing with the use of logical arguments and data.
Salespeople often think that they are in the best position for price setting and management because they are the closest to the customer. But it’s not that easy. Even if sales teams quote prices to customers and hear them respond to prices every day, that does not mean they’re the best people to optimise prices.
Better pricing is a lot like science. Not an art.
Price Remodelling
There are many reasons behind a price cut…meaning it can range from changes in supplier competition or getting rid of old and surplus inventory. Product quality downgrade and customer churn are other reasons. Also, during crises and through challenging times, most businesses resort to the oldest trick in the pricing rulebook: price reduction. So, when the need to employ sales promotion activities arises, a combination of marketing, pricing and psychological principles will mitigate margin leakage created by excessive discounting.
Any pricing intervention is like a “jab” on a superficial level. It functions as an external device developed to guide stakeholders towards better choices. Google and IBM use these methods quite often.
For example, some of the leading technology businesses have been re-publishing optimised price lists. They also tighten price reduction levels for heavily discounted consumables on their enterprise systems (superficial level). Others have been encouraging their sales force to avoid excessive price reduction by calibrating individual discounting behaviour with their take-home commission (deeper level).
In any price cut and sales promotion activities, you must let customers know through marketing tactics – meaning it’s best to accentuate the brand value and logic, rather than personal or business reasons.
Read how you can structure your pricing in 5 easy steps!
Price reduction: What’s your goal?
The necessity of a price cut must be justified, meaning they must be part of sales promotion marketing campaigns or activities. This is how you let customers respond and avoid the risk of them completely ignoring the price change. Simply highlight the new price, features, and elements. You’re not introducing a new product per se, but you shouldn’t only focus on the price decrease either.
Price reduction time frame calculator
Decide if your price cut is either temporary or permanent – meaning how long will it last? Are you risking margin loss or is there a similar product in your line that you want to differentiate its price from – so that customers have more choices? With the help of a price reduction calculator, a long-term price drop should receive the least marketing efforts. For short-term price drops, you must invest in a larger marketing campaign.
Temporary sales promotion activities result in a quick boost of customer numbers. But if you’re out to target a specific demographic and gain new patronage, then a permanent price drop suits the goal better. Of course, be on the lookout for your competitors. It’s highly likely that they’ll respond to all your sales promotion activities as well as in the industry. So, it’s important to focus on what makes your brand, product, strategy, and value unique.
Disadvantages of price reduction
Of course, in any industry, there are competitors. And it’s often a game of tug-of-war as to who keeps and gains more loyal customers. Oftentimes, when you initiate a price cut, it may lead to a price war. It’s highly likely that your loyal customers aren’t price-specific shoppers and that they’re after the long-term value. A price cut can generate a spike in sales in the short term. So, if you don’t prefer price remodelling, then you should consider including freebies or an upgrade to premium products/services on specific items.
In any pricing method, you must justify it to the customer base. This rule is just as applicable as it is for sales promotion activities and expensive items. A high-priced product or service must be briefly explained and included as part of the marketing campaign. Simply mention its uniqueness. That may come from its superior quality in the industry, compared to your competitors. This way, your customers understand the efforts that your team make to serve them with value. Ultimately, they get the rationale behind your pricing.
Sales promotion activities – What’s in it for sales professionals?
In the previous example, discount practices lessen as businesses employ psychological pricing principles of loss aversion. The hypothesis is that sales representatives will tend to avoid excessive discounting as it directly impacts their commission.
As we know from psychology and pricing principles, people feel the pain of loss twice as much as the pleasure of gaining. By anchoring sales to a higher commission number, the decision to quote lower prices triggers a physically uncomfortable response to discounting. In effect, a new pricing system discourages sales representatives from quoting larger discounts, as they associate discounts with losses.
Our brains and physiology simply dislike the prospect of loss (or risk aversion). The key assumption to this psychological and pricing intervention is how sales teams will hesitate using price drops as a tactic to win more deals at lower margins in fear of losing commission. However, knowing which interventions will work are different and must be tested every time.
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Bottomline
Sales promotion activities address specific psychological and pricing sticking points. When the condition for change is properly set up, then price reduction plans are more likely to work. It’s just as effective for nearly every significant problem related to pricing or market trend change.
For price rebranding, they are usually specific to address a problem to boost revenue either temporarily or gain new loyal customers for the long term.
Price interventions alter persisting customer behaviour. They’re primarily rooted in basic human psychology and pricing theories.
In summary, our capacity to change poor discount habits is often unrealised. And this is because most teams are not in the right position to take action.
See our blog on how pricing and sales can work together.
For a comprehensive view on integrating a high-performing pricing team in your company,
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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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