Pulling Pricing Back from the Brink

This has been the worst recession in my lifetime.  Business activity continues to be slow.  While there are signs that we may be at the bottom (why is that suddenly a good thing?) unemployment continues to rise.  Most companies are continuing in the survival mode.  They’re cutting expenses to the bone.  Capital projects are on hold.  Price discounting is used to keep the people busy or the plant active.  Comapanies are cutting prices where they have to and trying to hold when they don’t.  We’re all looking for the light at the end of the tunnel but aren’t sure what it will look like and when it will come.

I honestly don’t think the worst is over.  Yes, the recession might be over but there are lot of companies out there, big and small, that are on the brink of extinction.  They got there because they didn’t move fast enough to cut costs and inventory going into the recession (think GM and Chrysler and lots of technology/capital goods companies).  When the recession hit, cost cutting wasn’t going to be enough so they dramatically discounted their high value products.  Others, like United and the freight companies implemented unreasonable fees and alienated their loyal customers.  When the economy does grow again, these companies are going to quickly run out of cash and have a lousy business case with the banks and investors–an already skittish group.

There are companies that have survived during the downturn quite nicely.  I wrote recently about Oracle, once the poster child of discounting.  They’ve made lots of good acquisitions at low prices and rebuilt their value and pricing power.  And, they’ve leveraged both with good success.  Ford has gotten more customer focused and is beginning to see demand pick up in their popular models.  Cisco has held prices, continued to innovate and will be in fine shape when the global economy begins to rebound.  Microsoft will do just fine–especially with their new pricing and product strategy rolling out in several weeks.  They’re introducing a value priced flanking brand of Windows 7 and seem to have a good handle on getting customers to upgrade to the more functional suite of products.

A question for us all is: what should we do in anticipation of this blasted upturn that everyone seems to be talking about.  Here are a number of things to think about:

• First, don’t do anything until your business shows an uptick.  That could be in a number of areas of the future business dashboard: inquiries, proposals (a very dangerous indicator) or actual booked orders to mention a few.
• Now is a good time to review your strategy.  Don’t change it until you see the upturn.  For markets that are suddenly growing, a penetration strategy might be appropriate.  If you’ve been discounting the high value products to survive, you should be preparing to stop that once the markets do turn.  At least make sure you’ve identified the leading indicators we talked about above which would signal a change of strategy would be appropriate.
• Review existing policies and pricing systems and ask yourself a few questions: Are your pricing people disciplined about sticking to the process?  How well have your salespeople stuck to the rules and procedures?  If there is a disconnect–why does it happen?  If you’re reading this and don’t have any policies and procedures–now is a good time to begin to stitch them together.  Don’t worry about doing anything fancy here–just do something!
• Be ready to expand capacity.  Note I don’t say to expand capacity.  You should have a plan in place that identifies necessary resources to handle the increased demand when it comes.  Don’t jump the gun on this one.  With good pricing information systems (See chapter 8 in Pricing with Confidence!) most steel producers had held prices despite the dramatic drop in demand.  When they saw the possibility of a turnaround, a number expanded capacity.  But when the demand didn’t materialize–prices dropped dramatically–go figure!

Good pricers and managers are always looking ahead in the business cycle.  In upturns or in downturns, that’s true.  It’s a bit like walking a tightrope–you’ve always got to be ready to react but sometimes it’s just good to stay in balance.  If you don’t it’s a heck of a fall.