The Importance of Patience in Maintaining Price Integrity

You don't want to lose price integrity because it creates two large hazards: eroding profits and eroding customer lifetime value. If you developed a price elasticity curve in your new-product plan, you did lots of hard work to arrive at your price. Don't be hasty and abandon all that work at the first sign of weak sales. You'll instantly give up the profit margin you targeted in your plan, and that profit will be gone forever.

Your business case should tell you how much profit you will sacrifice if you knock the price down 5, 10, or 20 percent. If you make such a price cut, it cannot be repaired easily. You'll wind up losing profits over the lifetime of your relationship with customers.

By making a knee-jerk price reduction, you may also do major damage to your brand. Cutting your price could permanently damage your brand by creating a negative perception of its quality. If your customers perceive your discount as signaling a lack of confidence in your product's value, they may not want to buy it at any price.

Holding onto your price is especially important in the first few months after a product arrives. Think of your pricing as the narrative you're creating about your product's value to customers. If you release a product and cut the price a short time later, what you're saying is, “Sorry, we made a mistake.”

That said, sometimes it is not that black and white. Occasionally, you might have to cut your price to gain traction. If you do, make sure you are in the driver's seat to avoid rash moves. You need to plan this out and ensure you will get something in return if you give in on price. This would preserve your price integrity.

Why are knee-jerk price reductions so common for new products shortly after they hit the market? Well, when initial sales disappoint, that's a scary time for your team. It has invested a huge amount of time, energy, money, and career capital in the product launch. And now it's not going well. The temptation is to do something—right now!—to jump-start sales. The most obvious tactic is to cut the price.

One European company was not prepared for lower-than-expected sales of a new product. After its product hit the market, a competitor launched an aggressive effort to win back business in the Netherlands. Its sales manager for Holland (where the firm had a 70 percent market share) let his European head of sales know about that. The head of sales panicked, asking the CEO for his support to start discounting across Europe to keep sales high. The CEO, now worried about similar scenarios in markets around the world, told the global head of sales that he was free to make any pricing cuts he felt were necessary until the end of the year.

The firm's pricing strategy had wilted away in a single day—mainly because it was unprepared. (See Figure 12.1.)

But this is when successful innovators must remain cool, calm, and collected. If you haven't anticipated the possibility that sales might lag, and you haven't planned a response, this is no time to overreact. This is a time to stop and think. Either something has changed that you had not anticipated, or your original plan had a mistake. You will be much better off responding after you analyze what just happened rather than thrashing about with a new promotion or price cut.

Showing patience about pricing is more important than fretting over sales numbers in the first months after a product launch.

Think price last.

How to Prepare for Post-Launch

The post-launch phase is typically hectic for the product team. Your product is finally in the market. Everybody is nervous. What are the initial customer reactions? Are they as good as we estimated? Are sales according to plan? What is the competition doing? And so on.

This is also a period in which many mistakes are made, because of the hectic pace and because actions are taken too spontaneously. Of course, you cannot plan everything in advance. But you can prepare for the most common reactions to avoid those spontaneous mistakes.

Here are some tips and tricks to keep in mind when preparing for post-launch.

1. Be patient addressing post-launch problems. They typically come in only four varieties, and you can prepare for them: (1) the market doesn't understand your product's value or you didn't explain it well; (2) your competition undercuts on price; (3) the competition launches a competing product; and (4) regardless of what the competition does, sales are below plan.

Being patient doesn't mean doing nothing. Rather, your firm must take all-hands-on-deck action to determine the cause and solution to your post-launch sales problem. Your task force should include all relevant business functions—sales, marketing, finance, product development, product management, and so on. The task force's first task is to pinpoint the reasons for the problem.

What if a competitor undercuts your price? This recently happened to an industrial products manufacturer. The firm asked us to determine the causes of disappointing sales of a new product. We examined everything. The culprit turned out to be a competitor's preemptive price cut. Anticipating our client's new product, the competitor offered huge temporary discounts that required high minimum purchase orders—all before our client had shipped one new product. By the time the product hit the market, customers had already stocked up on the competitor's discounted product and had no room for the new one, even though it had better quality.

Alternatively, your poor sales could be due to a feature problem, a distribution channel problem, a market awareness problem, or a quality problem. If you've done your pricing strategy work properly, you probably don't have a pricing problem. But you need to search far and wide for the source of the sales problem.

BMW did this in 2001. The company traced the reason behind the slow sales of its new 7 Series sedans. It found that European customers thought it was ugly. (Americans did not.) BMW decided to keep the car's price high. If people do not like the car, they will not buy it, even if it is 10 percent cheaper. Instead, BMW reduced its sales targets—not its price—and started working to design a face-lift right away.

2. Go beyond financial KPIs and track monthly outcomes. To measure the progress of new product launches, most companies track only financial key performance indicators (KPIs)—typically volume, revenue, and profit. These measures are grossly inadequate. You must also track sales, customer metrics, and operational metrics to keep a pulse on your new product after launch. Sales KPIs such as win-loss ratio, percent deviation of final price from target price, average sales quoting time, and price as a reason for win/loss will give you crucial insights on sales team performance.

If you are losing a high percentage of deals or your sales greatly and consistently deviate from your target plan, or if the sales force complains that price is the only reason they're losing deals, you could have a sales training problem. Or you may have to revisit your pricing guidance.

KPIs such as number of escalated deals (where someone higher in the organization approves a price), price changes upon deal escalation, and the number of rejected escalated requests will shed light on the health of your sales operations. If the approved prices are the same as requested prices, your sales operation has essentially instituted a rubber-stamping deal escalation process. A healthy escalation should always have reasonable amounts of pushbacks, changing prices on at least 30 to 40 percent of all deals.

By the way, be prepared to learn that your price might not be high enough. The number of escalated deals is an important KPI here. Having too few escalated deals could indicate the sales team is finding it too easy to sell. You need to ask yourself whether you priced your product high enough.

As a rule of thumb, at most 20 to 30 percent of your deals (depending on industry) should be escalated. Last, KPIs such as price difference achieved across segments and how often features are used indicate if your customer segmentation strategy is working and if your customers get value from your product.

3. Do deal “deconstructions” regularly. You need to dissect the reasons why you're winning and losing deals. You should bring together a cross-functional team (including sales, marketing, pricing, finance, and product) that was involved in the deal. The objective is to fully deconstruct the deal to understand whether product strategy, price strategy, and value communications were applied correctly. Through the deal deconstruction process, you can identify weaknesses and, more important, best practices to be applied to other deals. This step is important; it rallies the sales troops and gets them aligned on successful practices. But you must frame these deal deconstructions as a learning experience, with no repercussions for a particular function or group. You want an open and honest assessment of what happened and what else could have been done, not a finger-pointing session.

4. Advocate pricing patience: Make your team come up with three nonpricing actions before you approve a price decrease. Spontaneous price reactions—usually price decreases—are a typical problem in the post-launch phase. This is an understandable but wrong response. If sales are below plan or, say, competitors slash their prices, companies look for a quick fix. Lowering prices seems ideal: You can do it right away, without any investments, and see quick results. But, as we have stated in this and other chapters, this is extremely shortsighted. You run the risk of a significant downside.

Pricing patience is an important capability of every organization. But as simple as it sounds, it is the most difficult thing to get across to executive leadership. To maintain and institutionalize price patience, here's an approach that typically works: Before getting approval for a pricing reduction, make your team come up with three nonpricing alternatives. If the action must be a price cut, the team must explain why it is superior to the nonpricing alternatives.

Nonprice actions can include increasing advertising or adding to the value of the product. You could give customers a higher-end product at the same price. That will help you preserve your price. Even if you lower your price, you should ask customers for something in return. That something could be a longer-term commitment, greater volume, introductions to departments you have not sold to, endorsements and references, or joint press releases. Or it could be something else—as long as you're getting value for giving value.

A telecommunications firm in Latin America instituted the rule of forcing managers to come up with three nonprice actions before making price cuts. A board member of the company stated afterward: “This simple rule had the highest impact we have ever seen and instilled the right discipline we were seeking. It was simple and everybody understood it.”

5. Before reacting on price, war-game your competition's counterreactions. This is another simple way of avoiding a knee-jerk price reduction. Write down how you expect your major competitors to react. Then simulate your position after that reaction: projected sales volumes, market share, profit, and so on. If you built your business case on the principles we presented in Chapter 9, you will be able to anticipate your competitors' reactions.

If your war-gaming shows you will be worse off if you reduce your price after the competition attacks, then don't. Look for other strategies. Why make things worse for yourself? This may sound like simple common sense, but you'd be surprised how many companies just don't budget for competitive reactions. If you took this approach to playing chess, you'd lose in a few moves.

6. Unusually high sales could be a high-class problem. This is the hardest problem to acknowledge, and it requires the same disciplined solutions as unexpectedly low sales.

You launch your new product and a wonderful thing happens: Sales volumes are way beyond expectations. Time to celebrate? Not so fast. You actually might have a problem—pricing lower than you needed to and leaving money on the table. That, of course, means you have a minivation. Did you simply misjudge your market size, as PlayMobil did when demand outstripped its supply? Or does your main competitor have manufacturing problems?

Of course, higher-than-expected sales is a good problem to have. That's why most companies do not view it as a problem or, if they do, they do not examine it. But too-high sales should be examined as rigorously as disappointing sales. So, once again, use a cross-functional team to find out the key reasons for the bigger-than-expected success. Then develop a plan that solves this “problem.” If your product delivered more value than you thought customers were expecting, raise your price. But do it carefully, and in several steps.

We've seen this happen many times. In the 1970s, Mercedes introduced a new SL car. The model sold out in a few months, and would-be customers were put on a waiting list of two years! Mercedes learned its mistake quickly: Its price for the new SL automobile was about 20 percent too low. However, it could raise the price only 3 to 5 percent a year. So the automaker had to wait a few years until it reached the optimal price level. In doing so, Mercedes left hundreds of millions of dollars in revenue on the table.

The Mercedes example shows the importance of getting the right price at the beginning. When you don't—when you severely and needlessly underprice your new product—you should accompany price increases with small product improvements that justify the price hike.

You can also try to convince customers to accept longer delivery terms. But you'll need to manage that process with, for instance, frequent updates on the status of their orders. The idea is to lock in your customers as strongly as possible to avoid giving your competitors the sales just because you're having trouble keeping up with demand. Alternatively, you could make greater supplies of the premium versions of your product and reduce supplies of the entry-level version.

But in general, be careful about overly increasing the price if you find yourself in similar situations. Customers will despise you, and competitors will see an opportunity to undercut you. Alternatively you could accelerate the development of the next generation of products and offset prices in the future releases.

Price Wars: The Only Winning Move Is Not to Play

Price wars are about seeing who can lower prices the most. You don't want to start one, and you don't want to be the first one to move. Ultimately, a price war has only one winner: the supplier with the lowest cost. Most likely, that's not you.

Price wars have deadly consequences for new products, yet as our research shows, managers are not only strongly tempted to use them, but also in denial about how they start. In our firm's 2014 Global Pricing Study, 83 percent of companies had felt increasing price pressures over the past two years. The biggest reason: low-price competition, either from new attackers or from incumbents. That pressure fuels price wars.

Everyone hates price wars, but no one wants to admit starting one. Fifty-eight percent of the survey participants said they were currently in a price war. (About 19 percent observed a price war in their industry but said it hadn't affected them.) An overwhelming 90 percent of those fighting a price war said that the competitors started it. A mere 5 percent said they started the price war intentionally, and 5 percent said they started it accidentally.

It's logically impossible that almost 90 percent of the time the price war is the other person's fault. That's denial. The truth is it takes two to tango.

With that in mind, CEOs and other business leaders can coach teams to treat price wars with extreme caution and not act on fear. At the root of such fear is misunderstanding: Competitor A wants to hit back at Competitor B because B stole a customer. Competitor C perceives that as a frontal attack, which provokes A and B to counterattack.

You need clear communications to avoid such misunderstandings. You must understand the reasons behind competitors' pricing moves. Leaders must ensure their teams know the unfavorable outcomes of price wars.

To avoid surprises that encourage price reduction thinking, put in place processes for updating models and forecasts regularly with new market information, then make people accountable for delivering on those forecasts. Make sure your models and forecasts include price elasticity assumptions.