Crisis doesn’t imply middle-age recipes, now is the time to actually do what we’ve preached
It is time to remember everything we’ve learned
You log on to LinkedIn or Medium, and you are submerged by blog posts and articles. A lot of people have time to write and they are concerned about their business survival (and some other don’t have time at all because they are already struggling). The tonality is, more or less “hey, stay positive, we are going to go through this crisis”. But let’s be honest: fear is dripping out of every single one of these posts. Because we all know what is coming, cold and hard as steel: bankruptcy, market contraction and cost reduction plans. Massive cost reduction plans.
Our economic system has become very elaborate. We praise C-Level and employees to rely on subtle strategies, to be smart, to be agile. But in time of crisis, in some sort of ironical paradox, we come back to very basic and strong emotions, like fear, that seems to swipe out every piece of the collective wisdom we’ve patiently built in time of wealth.
Are we saying everything is lost? No, on the contrary. We believe positivity is utterly important in those times. We just don’t want that positivity to be a smoke screen to mask fear. We want you to be positive because there are actual reasons to be. We want you to keep calm, don’t rush into massive budget cut plans, and use, instead, every tool at your disposal to go through that crisis. Let’s take a deep breath and try to remember what we were talking 6 weeks ago, a small eternity.
Why don’t you use the pricing lever?
In its recent outtake regarding the COVID-19 crisis, McKinsey states that companies need to think and act across five horizons. The third one is very interesting though. They call it “return”: “create detailed plan to return business to scale quickly as COVID-19 situation evolves and knock-on effects become clear”.
The market will be reduced, but it will still be here. Companies will continue to buy goods and services, even if less. So, there are two questions you should answer in that perspective:
- How will you make those companies buy YOUR products and services instead of others?
- How will you increase your margin, to compensate the probable volume loss?
To those questions, pricing is a key answer. Data was in the hype before the crisis. Should we go back ten years because we are scared? Certainly not! We must fast forward to the “next normal” to quote McKinsey once more. And pricing is an easy, actual and profitable way to use your data. Let’s see how.
Those market shares are YOUR market shares!
Let’s dive in: companies with advanced pricing capabilities have an EBITDA 27% higher than their competitors, on average. You wonder why?
- Because pricing helps you react faster to market change, including your competition’s price change.
- Because pricing allows you to fine-tune your sales and marketing strategy, down to the level of each product if necessary.
- Because pricing gives you the opportunity to answer faster and more accurately to RFPs.
- Because pricing gives your sales rep consistency and confidence when negotiating.
- Because pricing gives you a clear line of sight, that you don’t need to adapt here and there with inconsistent rebates, you will end up tangled in.
In short, pricing can make you gain time and market shares, by summarizing a market vision, that will reflect into your prices, whether you want to make volume or whether you’re more inclined to take care of your margins. All your products will be at their right place: your high runners will beat the competition; your tail products will ensure your many transactions and good margins.
In a small market, all the share you take will be a step forward your survival at short-term, but they will more importantly be a strong foundation to your future position on the market. All those things a cost reduction plan won’t give you.
Are you sure you need a cost reduction plan?
Let’s quote McKinsey one last time, “For a distributor, pricing is by far the most powerful lever for improving overall margins and increasing profits. A 1 percent price increase across the product portfolio has more impact on bottom-line margins (earnings before interest, taxes, depreciation, and amortization, or EBITDA) than a 1 percent uplift in volume or a 1 percent reduction in procurement cost or in selling, general, and administrative expense (SG&A)”.
That very same study found it would take a 7.5% reduction in fixed costs to achieve 22% increase in EBITDA that a 1% increase in pricing delivers.
We start that paper in a very dark tone, because those are dark time. But we end it up with good news. Because our collective creativity, strength and intelligence as brought us great tools since 2008, to overcome this crisis without giving it to fear. Pricing is a painless and effortless tool to raise your margins and win market shares. There are other tools out there which help you do well. Now is the time to actually do what we’ve praised those last few years: be agile, be creative, be bold and be optimistic.