Price Strategy and Inflation

The right price strategy adapts to a high inflation environment. Nobel Prize–winning economist Joseph Stiglitz sees prices increases as a “healthy balancing of supply and demand.” We believe that increases in demand are desirable for a business but failure to adjust pricing effectively to take advantage of those increases can leave a lot of money on the table.

Pricing can't “solve” the economic problems that we are all now facing. What a price strategy can do is mitigate some of the damage in terms of lost profits and revenue rising inflation imposes on businesses. The good news is that in times of inflation, consumers and business partners expect to see price increases. Inflation watchers note that demand, especially for manufactured goods and professional services, remains strong. This demand remains resistant to price increases. While you may not be able to price your way out of a recession, you can price your way out of inflationary times, especially when consumers expect you to increase prices and, at the same time, are willing to purchase more to manage their own spikes in demand.

The smartest pricing leaders also acknowledge that inflation and supply chain disruptions further require them to be initiative-driven in their price strategy evolution.

This kind of proactivity requires companies to be vigilant about runaway discounting. We are talking about indiscriminately applying price discounts to meet short-term sales objectives. Discounting simply trains customers to hold off placing their orders in anticipation of even deeper discounts. But there's a bigger problem than leaving money on the table. Rather than selling your products and services because customers derive value from them, you end up selling them just to meet your numbers. It's never sustainable to exchange short-term opportunism for long-term customer development. You may get a high from the adrenalin rush of the end-of-quarter madness, but you end up leaving so much money on the table, you might get asked to leave the game.

It's a game that almost all businesses play. Every year, leaders make sales projections for the business to meet. These projections get reported down the chain of command, commercial teams get their marching orders, and everyone waits for the results to be reported up the chain of command. If it turns out that the company has hit its projections, satisfaction abounds. It's a sign that management understands the market and is in control of the business. When the company outperforms the projections it is seen as evidence of particularly talented managers. No one asks why the particularly talented managers set the targets too low. This is a reactionary process that undermines both perceptions of value and subsequent profits. Being more strategic with your pricing helps firms make better decisions that protect and grow profits

Inflation and Supply Chain

Inflation and supply chain disruptions are linked. Supply chains are fragile processes that rely on business stability to work efficiently. The shock of the COVID-19 pandemic sparked a cycle of instability in the global economy that is unprecedented. Closed borders and disruptions in supply cascaded down the global supply chain. When supply chains are disrupted, businesses everywhere feel the pain. In extreme cases, businesses are forced to shutter plants and lay off employees.

Global supply chain disruptions are nothing new, but the COVID-19 pandemic compounded by inflation woes created unprecedented disruptions. Consider the microprocessor chip shortage. Millions of products now rely on tiny computers on a chip. These microchips power a wide range of products that we don't necessarily think of as “smart.” But a typical automobile today uses more than 1,000 microchips. Electronics have gone from representing just 18% of a car's cost in the year 2000 to over 45% of its cost two decades later and is projected to be 45% by 2030, according to The Economist.

In retrospect, it's clear how the global chip shortage developed. First, demand was already outstripping supply by March 2020, when the pandemic forced many manufacturing plants to shut down while closed ports backed up container ships for months and increased transportation costs by orders of magnitude. Companies watched helplessly as their goods languished on container ships stranded in the Suez Canal or stuck at the ports of Los Angeles and Long Beach, California.

Re-opening plants is difficult; replacing those laid off workers in a shrinking labor pool is even more challenging. Businesses are increasing wages to lure back workers to re-open plants. The need for wage parity increases pressure to raise wages for existing workers. The result is inevitable: a continuing cycle of worker shortages and higher prices. Inflation causes labor costs to soar, of course. But the labor market we're experiencing is not a typical hiring boom. There's every reason to believe that even when inflation is tamed, labor costs will refuse to stabilize.

The pandemic has forever shredded the power relationship between employers and employees. Remote work has permanently changed the way people think about earning a living, with the emphasis placed more on the “living” than the “earning.” Other workers who jumped into the freelance or gig economy will not soon give up the flexibility and control that comes from working for themselves. Employers who make the mistake of forcing workers back to a full-time office settings will learn that their most productive workers would rather quit.

With all of this turbulence, here are a few things to think about:

1. Understand your market. Make sure you have up-to-date insights into what's really happening in your market. We'll talk about this more in Rule Seven, but for now the point is to develop the business intelligence of the overall market conditions, competitors, and how inflation shocks are likely to change the behavior of all stakeholders. We recently witnessed a situation in which a strong and dominant competitor entered one of our client's markets that had been protected from competitive pressure. Panicked, the client told us it had no choice but to react to this intrusion. We counseled a bit of patience and analysis. Careful consideration demonstrated that the competitor suffered from two deficits. First, the product it offered was perceived as a lower value alternative. Second, the competitor had a questionable approach to distribution. The analysis led to further protecting both the supply and distribution chains, which dramatically enhanced our client's competitive position. We'll talk about this more in Rule Ten (Deploy Three Practices to Increase Profits).
2. Understand your customers. You and your customer may have the same worries. There's power in that. If you are worrying about inflation, you might be surprised to learn that most of your customers are worried about supply chain issues. That gives you an understanding of how to position your price increases as being not only fair but also reflecting costs necessary to stabilize your supply chain. Customers see a benefit in dependable suppliers. This gives you an opportunity to respond to their real concerns and strengthen your relationship by addressing those concerns.
3. Get more dynamic with price setting. Look deeply at current discounting practices to get control of them. That usually means systematizing pricing. Inflation obliges most companies to establish new guidelines even as they accelerate the frequency of price changes. What worked for the stable economic environment we enjoyed for decades is upended by the dynamics of inflation and supply chain challenges. Companies that were used to re-pricing annually or even quarterly now find it imperative to re-price monthly or even weekly.
4. Fire unprofitable customers. We talked about unprofitable customers and the 20/225 Rule in Chapter Two. In times of inflation where profits can erode more quickly than normal, businesses cannot afford unprofitable customers. Seek out the unprofitable customers and let them go. A little analysis reveals who these customers are. These are the customers that hammer you on terms and conditions. These are the customers who ask for partial truck deliveries. These are customers who are constantly on the phone with requests for more service even as they stretch 30-day payment terms to 120 days. The first step is to tell them you cannot continue to serve them on present terms unless they change their behavior. And here, you have to be explicit on the behaviors you expect. We saw this dynamic play out with a number of our clients. For instance, one of our clients had a long-term and mostly frustrating experience with a large supply chain distribution company. With a little training from us, the lead sales representative asked for a meeting with the president of the distribution company and announced that the client would have to terminate the relationship because it was simply unprofitable to continue the relationship. The salesperson articulated the client company's concerns and what it would take for the partnership to be mutually workable. The president of the distribution company at first dismissed the threat. But as the client pulled back from the partnership, the company understood the value it was receiving from the client, changed its behavior, and converted to a customer the client could serve as a profit. Note that occasionally a threat to fire a client must be enforced. But in our experience, more often than not, a credible threat is enough.
5. Raise prices. Of course you need to raise prices; do it fast but don't do it often. Make it part of a planned and periodic exercise of reviewing cost changes and passing them on to your customers. Don't forget surcharges. Surcharges are another pricing variable to consider. Customers usually accept surcharges that are justified by external conditions. In the early days of the COVID-19 pandemic, many firms imposed Personal Protective Equipment (PPE) surcharges. Customers are familiar with the surge pricing of Uber and Lyft, as well as the rush hour surcharges on highway tolls. Be transparent about what you are doing. Position them as being fair given the circumstances. But be very careful of initiating surcharges if the satisfaction of your loyal customers is at risk. You may be better served to just increase prices.
6. Think longer term. Make “reliability of supply” a feature that becomes part of your selling, negotiating, and contracting process. It is one of the “Give-Gets” that customers hate at first but come to appreciate when they see that they have a dependable supplier.
7. Consider changes in price metrics. Switch to a price metric that helps mitigate market risks for the customer and you. An example of this is a switch from subscription pricing (static) to a usage-based pricing (dynamic). This gives the power to the customer to “control” their costs during a volatile market.

The nature of strategy in good times and bad, during times of growth or decline, recession, or inflation, is that it must adapt to accommodate the evolving nature of customers, competitors, and markets. Adept managers are continually assessing their business environment to assess not only the strategic approach of the firm but also how that approach needs to change in the evolving environment, what those changes are, and the cadence of the changes.

The very idea of a price strategy makes even the most capable managers nervous. One of our clients put the objection succinctly. “Given the dynamics of today's business environment, how is it possible to settle on a specific price strategy without limiting our ability to respond to what's happening in our markets? Markets move fast, customer needs change, and our competitors certainly aren't sitting still.” Believe us, in those conditions, strategy is even more critical. The trick, as we have argued, is to keep the strategy simple.

Choosing the Right Price Strategy

There are five primary drivers in choosing the right price strategy:

1. The value of your offering relative to the competition: As we pointed out earlier, your price strategy is defined by how you set price levels relative to your and your competitor's value.
2. An understanding of where the offering is in the life cycle: This is critical because market-level price elasticity changes with each phase of the life cycle. As a result, the best price strategy for one phase is often disastrous for another.
3. Industry economics: Knowledge of the overall health of your industry (is utilization increasing or decreasing? what about margins?) and your cost structure is essential. Industries with high fixed costs need to look at price strategy differently than industries with high variable costs. Cost structure will also affect how competitors play the pricing game.
4. Competitive dynamics: Unless you include competitors' likelihood of responding to your price strategy, you are missing a critical element. An analysis of the likelihood that they will accommodate or disrupt your strategy helps define how conservative or aggressive you can be in your approach.
5. Value relative to the competition and position in product life cycle serves to define the first cut for considering your price strategy options. Depending on your market, your final choice is best reconciled with other key influencers such as cost position relative to the competition, how competitors play the competitive game, and industry economic factors such as forward capacity.

Let's look at how these factors combine with the three basic price strategies to enable the price strategy decision.

The Three Basic Price Strategies

Skim Price. An essential precondition for skim pricing is an offering that customers believe is clearly differentiated from the competition. Prices are set high relative to mainstream competitors.

Neutral Price. Companies that use neutral price strategies typically do so because they want the basis of competition for customer business to be something other than price. Prices are set close to the competition with the intention of reducing the impact of price competition. This is especially critical when entering and during the mature phase of the life cycle.

Penetration Price. Companies use penetration price strategies precisely because they want price to be the primary driver of the purchase decision. Penetration pricing works when it can be used to establish a dominant market position.

Pricing Through the Product Life Cycle

Most products have a finite life cycle. As markets move through their phases of growth and adoption, price strategies have to change, too. Throughout that life cycle there are four distinct stages. The introductory phase is marked by slow sales growth as customers consider the benefits of the new offering. During growth, customers begin to adopt the offering in increasing numbers and the entrance of new competitors helps speed adoption. During this stage, sales volumes can grow at a breathtaking rate. As products achieve adoption by most potential customers, they enter maturity. During this phase, overall market growth slows and begins to level off. Finally, in the decline phase, sales volumes drop off as customers move on to other more up-to-date products and technologies.

Let's start with the concept of market elasticity. Elastic markets are quite responsive to changes in price. Inelastic markets are not. The concept helps pricers understand when price increases are likely to generate more revenue.

Overall market response to price (elasticity) is not the same in each stage of the life cycle. The most important thing to understand is that markets are only elastic (very responsive) during one phase: growth. As Figure 5.1 shows, the growth stage is unique in that the rate of growth is high. During this phase, customer adoption accelerates as innovative technologies start to gain broader acceptance. New competitors, seeing the opportunity, also jump in. Ironically, greater competition actually serves to increase the size of the market as more conservative customers perceive that an innovative technology is a safe bet and becomes even more widely available.

Increasing customer adoption and the increased visibility brought by fresh players in the market often combine to accelerate growth. Let's see why this is important and what causes it.

Demand in BTB markets is derived from some downstream market. This means that demand for products won't be responsive to price changes; instead, they will be responsive to how the demand in the downstream market (the customers' demands) changes. As an example, General Electric sells engines to Boeing. Boeing makes and sells twenty-four 777 widebody aircraft per year. Despite any price change or strategy that might be considered, Boeing is only going to buy 48 GE-90 engines. Demand for the engines is derived by demand for Boeing aircraft. This makes it, by definition, inelastic.

The second reason comes down to customer behavior. Some customers will change suppliers often. They don't change their volumes, something that elasticity research tries to capture. They change their suppliers, often due to price. We call that cross-elasticity of demand. If we measure cross-elasticity of demand, we can determine a market's responsiveness to our changes in price, but it is unlikely that the volumes will change. That's because demand is derived. This means that the elasticity will not bring more opportunity for volume. Finally, you need to include competitive behavior in the mix. This is the most essential element of the mix. Even if a market is elastic (see Figure 5.2), when a competitor matches your price decrease, they negate any market effect. If your market is inelastic, as most markets are, you've just burned through profits playing a game that you can't win. Sometimes we see clients struggling in inflationary markets drop prices to maintain volumes. All they have done in this situation is erode profitability and potentially shortened this phase of the life cycle.

Let's summarize how this should impact your decision on price strategy.

Remember the only stage of the life cycle when markets are elastic is during growth. As Figure 5.2 shows, during all other phases of the product life cycle, decreasing prices will lead to long-run decreases in revenue. You may get a short high from a price cut as customers switch their business to you, but the benefits are short-lived. Competitors will simply match your prices.

Introductory Markets

The pressure to cut prices can be intense. When rolling out an innovative product or service, marketers are focused on identifying and selling to innovators and early adopters. These are customers that actively seek out new and innovative offerings before others do. Importantly, these customers are desirable because they become references for other customers, and they provide critical input that translates into market success later in the life cycle.

Given these two significant benefits, companies are often tempted to buy early business with low prices. This temptation is not necessary because customer motivations run the gamut from the logical (exploiting the latest technologies to get ahead of the competition) to the emotional (a desire to simply be the first to use an innovation). The decision to be an early adopter is also driven by a desire to advance the company's brand as an innovator operating on the forefront of its industry. Regardless of the specific motivation, early adopters are more interested in putting innovation to work than they are in price.

In his groundbreaking work Diffusion of Innovations, Everett Rogers estimated that innovators and early adopters make up 16% of those that adopt a technology. Given the limited pool of customers and their relative lack of price sensitivity, the best approach at the introductory phase of the life cycle is to pursue the skim pricing strategy. Such a strategy has significant benefits. A high initial price sets the reference for future generations of customers and revisions of the product. Also, a skimming strategy at introduction can actually improve adoption, as early customers will use price as a proxy for value. Discounting prematurely will actually undermine customer perception of value

There are two major challenges at the introduction phase of a life cycle. The first is selecting the right customers. These are customers who are more likely to accept the risk associated with a new innovation to gain a competitive advantage. If salespeople target the wrong customers, chances are they will expect a lower price for unproven innovations. Here, the price isn't wrong; the customer is. The second is in proving the value of the innovation. Companies that successfully gain adoption of their innovations do a lot of work to show their value to would-be customers. Without addressing value, the customer will focus on price to decide whether the opportunity to determine the value of an innovation is worth the price and associated costs. Intel and Apple are expert innovators. They consistently introduce their newest technology products with a skim price strategy.

Growth Markets

During the growth phase of the life cycle, the number of customers increases dramatically. In addition, many of these customers are inexperienced and will need additional services and support. Existing customers typically begin to expand their usage to peripheral parts of the offering. With these predictable forces, it makes sense to create bundles of service and support for inexperienced customers. Innovation-driven companies also respond to the increasingly sophisticated needs of their early customers with complementary product and service offerings. They evolve their offerings to meet the differing needs of both high- and low-value segments.

Since an innovative technology is still unique during the growth phase, as well as bundled services, does a skim-price strategy make sense? Not always. Here's the complication. A skim-price strategy may retard market growth or open lower price markets to competitors just as growth begins to accelerate. Sticking with a skim-price strategy too long gives these competitors a chance to enter the market with competitive technologies at lower prices. Remember that markets in the growth phase are elastic. This means that lower prices will increase demand and revenues. The key question is how to manage this. Simply lowering prices on your high-value offerings to meet the new competition may help with market share, but it will quickly erode profits in high-end segments. The solution? Be the first to break for the bottom with an option for a low-priced stripped-down offering to flank the competitor's high-value offering.

Intel deployed great strategy against AMD. Using its technological lead, Intel would skim price major new products and then drop prices significantly after the volume from early adopters showed signs of leveling off. Doing so not only increased demand but it limited AMD's ability to make sufficient margins as it responded with comparable technology. And once customers had chosen Intel microprocessors, they more often purchased additional chip sets based on Intel-provided reference designs. AMD wasn't able to break this cycle until they leapfrogged Intel's technology with their 64-bit processor. With these products, AMD dramatically increased profits and saw their market share rise to historic levels only to see them drop when Intel introduced similar processors.

Mature Markets

As a market moves into maturity, overall demand levels off and the benefit of using low prices to grow the whole industry disappears. In fact, penetration pricing is poison if you are competing in a mature market. That's because penetration pricing reduces revenue while causing profits to decline dramatically. At the same time, penetration pricing increases the likelihood of a price war as competitors will quickly match your price cuts to recover lost market share.

The best response here is to skim price for high margins at the top of the market and use a neutral price strategy for main-stream and low-end market segments. Given the need to play the pricing game at multiple levels, it's in mature markets where product and pricing managers really earn their keep. The key to making multiple strategies work is a set of offerings that enable you to be successful at all levels of the market.

In addition to manufacturing a range of high-performance, heavy-duty engines for trucks and buses, Caterpillar also offers remanufactured engines for price-sensitive customers. The company actively promotes this low-flanking offering and explains why customers might want to consider it. Customers are told that Caterpillar remanufactured parts carry a “same as new” warranty to assure worry-free ownership. Price-sensitive customers benefit from remanufactured products that cost 20 to 60% less than new products. The company benefits by having a lower-priced flanking offering for customers who resist the prices of new products. These customers remain Caterpillar customers by not defecting to the competition and may be in a position to pay higher prices for new products in the future.

There is one exception to this rule. If you are in the enviable position of being a cost leader, then all bets are off. Cost leadership has substantial and unique rewards that lead to different decisions around price strategy. Often, cost leaders enter markets not by taking on the leaders but by serving the most price-sensitive customers first. For them, penetration pricing is the strategy of choice. This approach is typically sustainable through the growth and early maturity phases of the product life cycle. As the market moves deeper into maturity, even cost leaders need to consider adding enhanced offerings and higher-end products to reap profits from niche segments that begin to appear.

Failure to understand this transition cost Dell Computer its market leadership position in 2006. In response to the threat of a newly revitalized Hewlett-Packard, Dell aggressively dropped prices to win market share. The result? Profits dropped 51% from the prior year. Commenting on their problems in a 2006 New York Times interview, Michael Dell and Kevin Rollins noted, “We cut prices too aggressively in a number of markets to win market share. We didn't do a good job of it at all.” An increase in PC sales of 6% translated into an operating profit decline of 48%.

Declining Markets

In declining markets, diminishing demand is sustained by customers that have a strong preference for a particular technology. This preference is typically strong enough to make declining markets price insensitive.

To understand how this works, let's look at the market for a technology that many people think is dead, but surprisingly is doing quite well: vacuum tubes. These forerunners of today's integrated circuits were once common, powering every radio, television, and computer. Today, vacuum tubes are still popular among audio enthusiasts and musicians who value the warm sound qualities they are thought to deliver. These loyal customers are willing to pay for that performance. A typical price for vacuum tubes is $10 to $20. By contrast, an integrated circuit that performs the exact same functions with greater control and reliability costs pennies.

By focusing on these integrated concepts—market growth, relative value, derived demand, and price elasticity—you can arrive at the right strategy to produce healthy revenues and profits. Figure 5.3 illustrates what strategies are called for in distinct phases of the life cycle.

Price Strategy for Capital-Intensive Businesses

For companies with investments in plant and equipment, consider overall industry capacity and capacity utilization when selecting price strategy. In times of excess capacity, it makes sense to adjust prices downward only to the extent that the price cut helps utilize plant capacity. Capacity share and market share tend to equalize over time. Attempts to increase share during times of excess capacity through the use of a penetration price strategy can be easily matched and negated by the competition.

Conversely, as capacity begins to become scarce, it makes sense to start bringing overall price levels up. If not, the company is vulnerable to filling capacity with low-priced business. The potential damage will be worse if smart competitors start shedding their most price-sensitive customers with the intention of foisting them on you. The end result will be a sharp decline in your company's profits.

In the final stage of the business, when the industry is operating at or near capacity, the safe decision is to pursue a skimming strategy. There is one caveat. Always treat loyal customers fairly. While in theory you may be able to extract more profit from them at the top of the cycle, they will resent having their loyalty betrayed. Long-term customer relationships are valuable. To the extent customers consider your company as a partner, they will resist taking advantage when your company is at the bottom of the cycle. While this will mean forgone profits during good times, it will also mean more stable profits during slow times when the business of loyal customers is more meaningful. There is a trick to this that we'll talk about in Rule Ten (Deploy Three Practices to Increase Profits).

The Competitive Landscape and Price Strategy Options

Price strategy must be measured against what the competitors are currently doing or are capable of doing. There are two principal issues that pricing managers need to consider. First, what is the firm's cost position relative to the competition? Second, given the different options for an emerging price strategy, how is the competition likely to respond?

When looking at potential competitive responses, there are some obvious strategies to avoid. Penetration pricing against a low-cost leader is a nonstarter. The same is true in relying heavily on skim pricing against competition that has a win-at-all-costs, lose-no-deal-on-price mentality. We'll talk more about playing the competitive game in the discussion of Rule Seven (Understand Your Market). If you are uncertain about how competitors will respond, here's a helpful hint to avoid destructive price competition. When facing a volatile competitor, a neutral price strategy is always the safest. To support your strategy, it always pays to be able to keep competitors worried that you are prepared to adopt a penetration strategy to defend your market position. This threat reduces the likelihood that they will adopt a penetration strategy against you.

Be Prepared to Change Your Strategy

It's not really that tough to pick a price strategy. The challenge comes in knowing when the market changes to act quickly with a strategy change. So what are some signs that conditions require a change in price strategy? Here are a few to keep an eye on:

Unit sales volume growth slows down: This, along with a change in customer price response, is the primary indicator of a transition from one phase of the life cycle to the next. When entering the growth phase of the market, if you grow but not as fast as the competition, it may be time to lower prices. When moving from growth to maturity, growth starts coming increasingly at the expense of the competition. When this happens, it's time to deploy multiple strategies, especially neutral prices.

Discounts fail to drive incremental volume: Look at your graphs of price discounting versus gross sales growth. When one line starts heading up (discounting) and the other starts heading down (sales growth), this is a signal that it's time to start thinking about changing your strategy.

Competitors introduce new offerings: Time to check your value positioning. Have you gone from being a leader to being a laggard? If so, you need to move away from skim-price strategies. At the same time, be mindful of Rule Six (Innovate for Growth).

Lower-cost competitors enter the market: Are you providing an umbrella for them? Will they come after your high-value customers? If so, you need to move to protect your flanks with a penetration priced offering.

Competitors start missing their numbers: There is nothing more dangerous than a desperate competitor. Time to try to take the focus off price.

What About During Inflation?

Remember, product lifecycles are a function of changes in demand and customer adoption over time. At a market level, the demand does follow the phases that we outlined, but what happens to these phases during inflationary times? If you are able to pass the cost along knowing demand is there, then no changes are needed in any of these phases. The most common question we get from clients is “what if competitors don't also raise prices?”

Let's first look at reasons the competitors might not raise prices. First, they may be more averse to the risk of driving customers away. Second, they may just be slow to respond to cost pressures. Both are fairly common reasons. In either case, focus on what you can control. Our suggestion is to raise prices in line with your increased costs and hope the competitors come to understand the situation and then raise their prices as well.

The third reason is tricky. Here the competitor decides that now is the time to adopt a penetration strategy to pick up market share. Doing that in a growth market makes sense. Doing that in a mature market can lead to a devastating price war if you respond. In this situation, the reality is that in the short-term, the competitor will succeed in taking market share. Assuming that the competitor has a cost structure similar to yours, you can assume they will bleed profit dollars. But, if anyone has a cost advantage, then they will likely come out ahead in the long-term by using this low-price strategy to gain share and still maintain profitability. The key here is to understand your competitors and take as much unneeded cost out of your system as possible so you have the flexibility to choose the right pricing strategy.

What do you do if a competitor decides to take market share during inflation or otherwise? The best approach is to develop a model that identifies the different scenarios of how a competitor might respond. Part of that modeling should be your revenue and profit implications for different scenarios. If you lower your price and the competitor lowers it again, you will quickly see that you may be better served to let the competitor take the price-sensitive customers; you may very well have been losing money on those customers anyway. We did this modeling for a medical device manufacturer that was catching up to the innovation of two primary competitors in the mature phase of the life cycle. The modeling showed that any penetration price strategy was going to lead to the lowest profits and a neutral strategy with a high-value product would limit the price competition and protect profits. The introduced product quickly gained 30% of the market with good profits.

Making Salespeople Champions of Price Strategy

Within the first 10 minutes of a pricing training session, a senior salesperson from a national bank stood up and asked, “We are compensated on revenue. How is anything you teach us going to make us more money?” It was a great question. We replied honestly: “It isn't.” Revenue plans conflict with pricing for profit objectives. After the training, we suggested better aligning sales compensation with profit. Though the leaders taking the training (measured on profit) wanted very strongly to improve margins, they failed to act on our advice. Within six months, this large national bank failed. If salespeople are compensated to achieve sales volume, they will drop price and even go below discount floors to close a deal.

How do we support our salespeople, through compensation plans, tools, and messaging, to become the champions of the organization's price strategy? How do we get their buy-in to do so? These are the crucial questions that every company must address.

Many companies don't see the obstacles to creating sales champions that drive growth in both revenue and profits. There are four common reasons that cause salespeople to advocate for more discounts for customers, rather than profit for the company:

1. Sales incentives are misaligned with the company's financial goals.
2. Limited understanding of value compared to competitors.
3. Lack of visibility into how and why prices are set.
4. Lack of insights into the negotiation games that customers play.

It's a mistake to blame the commercial teams. Sales professionals are the victims of a combination of internal and external forces. The internal forces are represented by cumbersome internal processes and shortsighted incentive structures that undermine price discipline. Poker-playing customers that are discerning and savvier than ever constitute the external forces. Businesses can learn to empower commercial teams to be champions of price and deliver on their company's potential. The objective is to close sales at profitable prices without leaving money on the table. How does the company leadership team change behavior to enable salespeople to be champions?

Four Steps to Building Sales Champions

Let's consider four steps to arm salespeople to realize value and better price:

Price Strategy in a Recession

When a recession hits, demand declines. In a recession, the market growth projections anticipated by businesses are no longer tenable. Even so, companies initially respond to declines in volume by lowering prices in order to sell more products and services, desperately trying to meet gross revenue goals. This strategy is rarely effective. The problem is that other competitors are doing the same thing. They are all chasing business that is declining with lower prices, which leads to declines in revenue and dramatic declines in profit. Smart companies recognize this death spiral as a race to the bottom. Our advice is simple: never try to chase demand that because of a recession simply isn't there. The superior strategy is to adjust objectives, reset financial projections, eliminate unnecessary costs, and ride out the recession with your most profitable customers.

In reality, it isn't an issue of pricing in a recession. If you wait until recession is a reality to adjust price strategy, you are being reactive. A price strategy must be defined before a recession and in times when one might be coming. A system in place that tracks the likelihood of a recession or other market trends helps to execute the right plan at the right time. As a pricer, have a plan in place for what to do when the recession hits. It helps to have some leading indicators (such as end-use market growth) so you can get everyone ready to implement a revised plan.