By Kirk Jackisch, President & Fred Puech, Vice President of Pricing Analytics at Pricing Solutions
Amidst forced business closures, market uncertainty and global crisis, pricing remains critical for B2B businesses. Pricing considerations are the lynchpin to the defense tactics that can help a company survive a crisis, protect cash flow and remain in the black.
Industrial manufacturers, distributors and other B2B businesses around the world have been significantly affected by the coronavirus pandemic. Indeed, nothing like this has taken place in recent history. During this economic turmoil and uncertainty, remain focused on survival and know that reduced profits are inevitable.
To survive, quickly shift efforts from increasing margins and market share to retaining as much business as possible while eliminating and minimizing unnecessary costs. Rather than focusing on new sales, keep efforts on maintaining your existing market share so that you’re in a strong position to recover once the crisis is over.
Focus on Profitable Customers with the 80/20 Framework
The 80/20 pricing framework is particularly relevant during times of crisis because it helps B2B companies segment their customers into four quadrants, which clearly identifies, among other things, which customers are the most and least important…and profitable. During economic uncertainty B2B businesses must protect the customers who are driving margins and profits and these customers are located in Quad 1 of the 80/20 pricing framework, as seen below.
B2B companies that have a successful pricing strategy in place are probably already focusing on customers in Quad 1. These are large customers who are purchasing core, high volume products and services. During a time of crisis these customers become even more important, so double (or triple) your efforts here to retain their business. The revenue generated from these customers is critical to pay bills and continue operations.
Offer Additional Value to Quad One Customers
Offer additional value to these core customers whenever possible, which may mean looking at ways to reduce their costs for a limited time. Examples of added value could include:
- Lowering Minimum Ordered Quantities (MOQ) requirements
- Waiving express shipping fees
- Improving delivery times (at the expense of Quad 4 customers if necessary)
During the crisis, overserve 80s customers buying 80s products (and to some extent these customer’s purchases of 20s products), even if that means underserving your Quad 3 and Quad 4 customers. Why? When the crisis is over, you’ll need to use your core revenue from Quad 1 to recover.
Reexamine Quad 4 Customers
The customers in Quad 4 are typically smaller who are purchasing low-volume items. For most B2B companies, customers in this quadrant can be costly because fully-loaded margins from these clients are typically negative. As such, Quad 4 customers should be treated opportunistically (with potentially large price increases) or eliminated altogether.
Maintain or Reduce Prices and Eliminate Costs
Price increases are very hard to implement during a time of crisis, so it is better to maintain existing prices and deal with the reality of decreased profit margins than risk losing customers or existing market share. The exception of course is with customers in Quad 4 (and to some extent Quad 3) who are costly and are likely eating into your profits.
Remember that the goal during a time of crisis is survival and to survive you’ll need to sell more and offer more value to existing customers. Once the crisis is over, your company can look at ways to recover lost margins.
Keep this goal in mind when dealing with a drop in demand and consider offering limited-time discounts on product (or services) when it makes sense. For example, distributors may consider offering time-sensitive discounts on in-stock items that would otherwise be difficult to move.
Manufacturers may consider a limited time price drop to keep plants running above breakeven capacity. Generally speaking, if production drops below breakeven for an extended period it may need to be shut down. For this reason, it’s important to keep volume up and keep selling to Quad 1 customers, providing limited-time price discount that return smaller profit margins.
Of course, during times of uncertainty all companies should re-examine expenses and eliminate unnecessary costs. Remember, it could be costing you money to do business with customers in Quad 4 and to some extent Quad 3.
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Looking for ways to ensure your B2B business can survive a crisis? Give us a call. Our team is available to assist companies through the uncertainty and turmoil caused by the coronavirus pandemic.
