Remember how we were taught in secondary school that the market prices are controlled by the forces of demand and supply?
Well, it is not far from the truth, as even the most profitable ventures with massive market share are bounded by the forces of demand and supply, and the outbreak of coronavirus (COVID-19) further proved it.
The coronavirus pandemic made demand volatile, creating a variety of supply and pricing challenges, making even the most profitable ventures focus on long-term value rather than the short-term gain to best position their business venture.
While it’s challenging to take a long-term view in the fog of a crisis that seems very dynamic, we expect that the companies that emerge in the most influential positions will be those prioritizing their relationships with customers and the communities where they do business.
In this brief article, we suggest some “dos and don’ts” to help startup founders steer thru the unmapped territory during the pandemic. The situation varies widely across industries and geographies, so we offer an overview of pricing considerations here, not specific advice for any one company.
The Variety of Shift in Demand Caused by the Coronavirus Pandemic
Each company faces a unique array of challenges today; no single approach or solution will suit them all. But it can be helpful to consider pricing challenges in the following three main market scenarios:
1. Companies experiencing a sharp and unprecedented drop in demand
This downward shift in demand relates mostly with Sectors directly affected by social distancing, and government isolation guidelines, such as airlines, hotels, and food service, are acutely impacted today. As they struggle with decreased demand, they also have excess capacity to supply and heightened price sensitivity. Many of these companies are getting requests for steep discounts, and new terms as their competitors scramble to attract the few remaining customers, at times with prices well below cost.
2. Companies experiencing an explosive increase in demand
While some businesses are suffering a decline in demand, some companies are now rushing to expand capacity. In this category are mostly companies that provide critical products and services, such as medical supplies, shipping, and cleaning. Also, products used in the confined of the homes are highly sorted after, from toilet paper and canned food to audio headsets, video conferencing, and home entertainment.
While this may seem like a rare opportunity to generate outsized profits, perceptions of price extorting could cause a severe reputational and even legal consequences. We urge you not to raise prices sharply on essential goods or services to take advantage of an emergency.
3. Companies with muted or lumpy demand
There are also some sectors, such as home improvement, landscaping, and consumer electronics, not directly affected by COVID-19 but feel the impact of a general slowdown as people’s lives change at work and home. As a company in this category, you have an opportunity to take near-term pricing actions that preserve and build value.
Things to get right during the pandemic:
1. Make sure that every pricing action is legal, ethical, and community-minded
A humanitarian crisis is not the moment to sharply raise prices on essential goods or services. Any significant price increase should genuinely reflect increased costs irrespective of a sharp rise in demand for your product.
2. Take a through-cycle view of customer relationships
In a time like this, keep a long-term perspective. Reinforce trust by tracking key customers’ growing needs, stand by and defending them during their toughest times. Providing incentives for loyalty can also strengthen relationships while decreasing incentives to switch to a competitor.
3. Create ‘flex’ in pricing
Creating flex in pricing will involve providing temporary pricing or volume relief. In the long-term, a well-discounted arrangement will impact the business in the recovery. It would be best if you also explored ways to unbundle offerings, offer one-time promotions, flexible payment terms, credit for future purchases, or other techniques that show empathy to your customers.
4. Establish a commercial ‘value council.’
To avoid panic reactions and develop clear guidelines and objectives for your startup, you need a cross-functional team or war room to take a long-term view of your business unit. The team can supervise significant and strategic deals, and oversee execution, review deals for impacted segments and maintaining discipline.
Mistakes to be avoided
1. Taking advantage of customers
Short-term shortages and high demands may make it feasible to raise prices sharply, but this is unlikely to serve the company well over the long run. For example, recently, the Washington State attorney general ordered five Washington businesses to stop selling protective masks, hand sanitizer, and similar items at vastly inflated prices through Amazon.com, or face lawsuits and fines of up to $2,000 per violation.
2. Assuming that every demand problem can be solved with pricing
In times of crisis, buyers will likely hold off on purchases because they feel uncertain, or their needs have shifted in meaningful ways. For example, offering concert tickets for free right now will not fill big-city arenas. In many sectors, a deep price cut will not raise the volume, and will unintentionally destroy value rather than build it.
3. Relying on old price-sensitivity research
In an active and evolving market, market price tests become outdated after just a few weeks or months. To understand changing price points, you should run new pricing-sensitivity research and market price tests immediately, particularly for higher-volume products and offerings.
4. Slashing list prices without considering other options
The manner at which the price reductions are made can make a big difference in a company’s ability to sustain and build value over time. Instead of slashing prices, for example, you may want to consider temporary promotions, non-monetary discounts, or discounts that help build volume.
The COVID-19 crisis and the accompanying global economic downturn have spurred a variety of demand responses across and even within businesses. Despite the alarm and uncertainty, we believe startups and small businesses of all kinds should continue to rely on some best practices and guideposts.
In this terrible and confusing moment, each of us has new opportunities to show courage, compassion, and wisdom. And while no one knows how long this crisis will last, founders can begin preparing now for the recovery.