Pricing Strategies for Uncertain Times | HBR IdeaCast

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1:06Rafi Mohammed:Welcome to the HBR IdeaCast from Harvard Business Review. I'm Kurt Nickish.

1:17Rafi Mohammed:As many businesses continue to operate in crisis mode, their leaders are making a lot of tactical choices to, well, just stay in business. From day-to-day decisions to long-term strategic ones, The goal is to keep your organization afloat now and claim market share of the demand that does return when the crisis is over. And a key aspect of all of this actually is setting prices. In panic mode, whether you're a car manufacturer or an airline or a self-employed consultant, the initial instinct might be to start slashing prices. The idea being to hang on to more customers and keep revenue coming in.

1:55Rafi Mohammed:On the other hand, say you're a food delivery company or a cleaning supply company, you're seeing a spike in demand or maybe expecting to serve pent-up demand. Your initial reaction might be to raise prices. But today's guest says going with those initial reactions without thinking through your pricing strategy can end up really hurting you. Joining us today is Rafi Mohamed. He's the author of the book, The 1 % Windfall, How Successful Companies Use Price to Profit and Grow. And he founded the consulting firm Culture of Profit, where he helps companies develop their pricing strategies, including, I want to disclose, Harvard Business Publishing.

2:35Rafi Mohammed:And he's here now to talk through pricing in and out of a crisis so that you can survive it and keep your organization's value. Rafi, thanks for being here. Kurt, thanks so much for having me. It's a pleasure to be here. Rafi, a crisis like this is really testing businesses and nonprofits. Is it an exaggeration to say that if you don't get your pricing right during this time, that that could spell the end of your organization? I think if you don't get your prices correct, it could start the demise of your organization. Pricing is really going to be key during these very challenging times for consumers.

3:13And sort of due to uncertainty, a lot of companies aren't giving financial guidance and they're really being conservative. So what that translates into is unless you're a company like Netflix or Peloton, which is enjoying demand, most companies are facing a weakened consumer that's very uncertain about the future. And that's a very challenging time. So price is very important.

3:36Rafi Mohammed:Yeah. So most people think about pricing as a two lever strategy, raise or lower prices. Price is far more than sort of a period, a point on the demand curve saying this is the right price. There's a lot of creativity associated with pricing that's really untapped. And does that hold for... Chevy is called the heartbeat of America for a reason. With SUVs made to move with your rhythm. The versatile Equinox tackles your entire day. The spacious Traverse fits your crew and your whole weekend. And tracks bring style with value you can count on. All infused with tech that has your back. so your drive always hits the right chord.

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4:26Rafi Mohammed:A crisis like this one or during a recession, I just wonder if you should approach pricing the same way or differently when you're in a situation like this. This creativity really should be done in any type of economy. And here's what's really interesting is that in a recession, Oftentimes people say, I want a lower price, but I've been involved with many pricing strategies where my client has been in that situation. And once they offer a low price version, the price point is out there. But customers will ultimately say, gee, I actually think the value of your current price is pretty good. So I'll stay at the current price.

5:05One of my favorite strategies is the concept of good, better, best. And a great example is the airline industry. Many airlines have come out with a basic economy type of seating, which you don't get advanced seats. You can't upgrade. There's a lot of penalties associated with that. And what airlines have found is that over 50 % of customers that start at the lowest price end up upgrading to a higher price. So it's good to have that price point out, and some people will take it. But oftentimes, having a good version will highlight the value of your other products, of your better and best products.

5:43And while it seems counterintuitive, especially during a recession, sometimes offering a best product is actually very good. And so a good example is the best product is your Rolls-Royce product. And while it seems counterintuitive to have a higher price, if you can justify the value, the long-run value of your product in this climate, customers are willing to listen why they should pay a higher price if it can be justified by it's better for you in the long run. So what do you do if you're, say, a movie theater or traditional retail where you are experiencing a cut in demand, a hit in demand short term right now due to the crisis, but you're also not expecting it to bounce back strongly or even recover to the level it was before for some time?

6:33Clearly, in the short run, you have to offer a discount. And what I would be focused on is what I call discounting with dignity in a manner that doesn't devalue your product in the long run and so that's really important because once you set a low price it's very hard to recover when demand eventually does come back and so a couple of ways that you can sort of discount with this dignity is for instance require a charitable donation you'll get a lower price if you donate to a charity and what you're clearly psychologically communicating to customers is that this is a one-off. This is unique. Don't expect this for the long term or require bulk purchase.

7:16You can get four, you have to buy four movie tickets, but you get a low price. And in the customer's mind, they can justify that price decrease because they're saying, oh, they're giving me a volume. Chronic migraine, 15 or more headache days a month, each lasting four hours or more, can make me feel like a spectator in my own life. Botox, onabotulinum toxin A, prevents headaches in adults with chronic migraine. It's not for those with 14 or fewer headache days a month. It's the number one prescribed branded chronic migraine preventive treatment. Prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection causing serious symptoms.

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8:59So let's say you're in the financial services industry and you set a low price, you can say, look, I'm willing to give you a low price but when your stock price reaches X, then we're going to go back to the higher price. So what I'm trying to outline are ways that you can discount in a manner that doesn't devalue your product in the long run. Now, what if you're say a quick service restaurant where you're taking a hit short term now, right? Somebody that didn't eat there in April is not going to make up that meal later. Like that's gone. Not to mention the, you know, lower density possibly in these restaurants or the extra cleaning and expenses that they have or additional people that they have to hire to handle safe service.

9:42This is more than demand returning. It's also a new cost scenario that you have to have to consider. Exactly. Exactly. And, you know, your clients who are coming in, they might be they don't have as much money in their pocket as they did before the virus hit. And so you have to be cognizant of that and offer them choice and offer them new types of entrees and really understand them and provide a product version that's for price sensitive people. Remember, some of the customers might be very happy to come back and there's no reason to discount their price. and some customers you might get who are trading down from a higher level restaurant.

10:22And they might be wanting to come into a mid-level restaurant and say, well, I want the best because before I was dined out at a higher price place. So that's why the notion of really not discounting and providing your customers price-based options is so important. What if you just look at the scenario and you realize that you have, maybe you're only allowed to operate your restaurant at 50 % capacity for some time, and you realize it's not even worth it to open unless you can charge more for the people who are coming in. Can you add a surcharge? Can you raise the price and also communicate that that's going to be temporary, but just communicate that this is sort of what's needed to keep the lights on at the moment?

11:03Great point. And certainly some restaurants will have to raise prices because it just doesn't make sense for them financially to be in business due to increased cost and reduced table seating. And it's really important in those cases to communicate it. So it's the COVID-19 surcharge. And be very clear with customers, this is why we're doing this. We have to do this. It's not necessarily always about a – you don't always have to offer a discount. You could offer a minimum, a table minimum. So I'm sorry, instead of charging a higher price, you could offer a table minimum, which would get people to spend more than they otherwise would and make that table more profitable than if someone came in and just ordered an entree in water.

11:50So there are other ways besides prices. Well, let's talk about something that's kind of fun, which is this idea of revenge buying or revenge spending. that's where businesses have taken a hit short term but they expect it to bounce back and perhaps even exceed what they had before travel and vacations is like one of those where people are like banking vacation days and that industry has stuff to work through but is also expecting in some scenarios booking booking more stuff further further out where they expect people to like pile on and serve this pent up demand. What do you think through pricing for a scenario where you think you may have higher demand than you had before?

12:35Well, specifically in the travel industry, they've done a great job of telling customers, our prices are going to be different all the time. And so my favorite hotel in the Caribbean, I'd say during the summer is one fifth the price of what it is during the winter. And so for most travel-related industries, customers are okay and have accepted the notion of dynamic pricing, that pricing is going to change. So certainly in those industries, there's the opportunity to capitalize on this higher demand with higher prices. But however, for other types of industries, yeah, sure, there's a pent-up demand.

13:12But if you raise prices, people remember prices. And so yeah, I get that there's higher demand, but you're in it for the long run. And for instance, there's a famous ice cream place very close to me. And I'm sure the moment that they reopen, there's going to be lines out the door, socially distanced lines, of course. And I'm sure they could raise their prices, but people remember that price. And then in a couple months, when people think about coming back, that higher price is going to be in their minds. And so I would sort of restrain myself from having higher prices, perhaps offering a best version, okay, to capitalize on that demand, but I wouldn't increase prices.

13:52And what about just, you said, let's not worry about Netflix and Peloton, but what if you are those companies, you have big increases in demand, and you expect that to be higher after the crisis than it was before. And we're seeing that in China and in, you know, probably the most advanced economy to be in the recovery stage, online game usage and, and online video watching is like 10 % higher now than it was before the crisis, even though it spiked higher during it. How do you think about it if you're, you're in that, that enviable position? Well, if, if demand and taste has shifted, like for instance, I think a lot of people found that, well, maybe I can work out at home and I don't have to go to the gym.

14:38Then with that increased demand, if it's sustainable, then as the economy recovers, you may want to think about having higher prices or giving people more a la carte options or having a best option to sort of capitalize on that increased demand. It seems tough though, still to like set your prices and think through these creative things at a time of flux, right? You've talked about being careful, not discounting too much. You've talked about not raising it too high. And so the default there might be to kind of keep things mostly the same. And how do you get the gumption to say, you know, we really need to analyze this and try out a different pricing strategy at a time when it feels like it's easy to be risk averse.

15:28We're coming off of a time of force reflection. As you've intoned, pricing is something that management struggle with all the time. And a lot of companies are approaching sort of the reopening as a time to reset, sort of reset how they think about their strategy in general. And pricing is certainly one of those tools. But I think more importantly, and I've seen this time and time again recently, is that customers are starting to say to businesses, we still want to do business with you. We just don't like the way that you price. Don't like doesn't necessarily mean lower price. It's we don't like the strategy that you're using.

16:07So not only you may have an interest in resetting your pricing strategy, but oftentimes what you're seeing is customers are now starting to demand that you change your pricing strategy. I'm curious how you recognize when you're getting that feedback or What are the classic things that you hear from customers or you see that give you an indication that they don't like your strategy, as you said? Well, certainly at this time, I would do sort of a quick survey of customers to better understand how they're thinking about your pricing strategy and the value that you provide. So let me give you a wonderful example of a company that did that.

16:44Hyundai did this in 2008. During the 2008 financial crisis, things were bad. The stock market was down. There were a lot of layoffs. And Hyundai actually took the time to listen to their customers. And the customers basically came back and said, look, of course, price is an issue. But the real issue for us is that we're worried about losing our job. So in 2009, Hyundai rolled out a pricing strategy that really – that sort of an assurance strategy that said if you lose your job, you can return your car to us. No questions asked. You don't owe us any money, and we'll call it a day if you lose your job.

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18:07And they're quoted as saying that in the first nine months of the program, less than 50 cars had been returned. That's an incredible example of a company that listened to its customers and created a pricing strategy to solve what their true needs were. What have you been seeing businesses do, whether they're small or large, where you've thought that's really smart or they should really rethink that. What is interesting at grocery stores, I've actually found that their sales pages are getting thinner and they're not having as many big sales as they used to. That's because demand is up significantly.

18:49But for companies that are sort of thinking about their pricing strategy, one of the easiest things for them to do is to scrutinize the discounts that they offer. So let me give you an example. McKinsey did a study, and they found that a 1 % increase in price, if demand is held concert, would on average increase operating profits by 8.7%. It's not bad. There's a very significant increase in profits due to something very small, 1%. And what I would recommend for companies these days when the reopening is for them to scrutinize their discounts and ask themselves, do I have to give this discount?

19:34And oftentimes when a company figures out what 1 % is to its bottom line, I've seen sales forces sort of look shocked because they're handing out 5 % to 10 % discounts very easily without much thought to it. And I'm all for discounting as long as you get a return on your investment. And many times these discounts are unnecessarily given. How do you know when the time is right to raise prices again? I think that when you see the economy improving and people becoming more confident about their spending and you're seeing your business approaching in terms of numbers, approaching what it was pre-crisis, that's a good trigger.

20:15And for a restaurant, it could simply be rejiggering your entrees and taking off some of the cheaper entrees and moving to some of the higher priced entrees. For a retail outlet, it could be the same thing of changing the SKUs that you're offering and or reducing the frequency of the sales that you've been offering. We're talking about this crisis as a very simplistic, you know, there's this crisis now and then there's the recovery. and then back to normal. But it's clear that the recovery could be gradual in a lot of places. It could go back and forth with future waves and shutdowns before a vaccine or other therapies are in place.

21:00So considering that there may still be a lot of ups and downs and it may not just be a V-shaped recovery like a lot of people are hoping, is there anything you can do pricing-wise to ride out those fluctuations? I think the next year or two is one of caution for businesses. And it's an area where I wouldn't necessarily rock the boat on pricing. And so come out with a new strategy and maintain it. And I think we're going to have to ride out the recovery. And then at that point, I think there's an opportunity to reconsider your pricing strategy as well as your prices. On this notion of a reset, what's the biggest misconception that businesses might have about that?

21:51I think the biggest misconception of pricing is the notion of cost plus. Whatever our costs are, we're going to add on to it. The key to better pricing is one, to consider what the customer's next best alternatives are. but two just as importantly listen to your customers and see what they're saying about your pricing and that's a component that most companies don't do now let's think about street vendors in the middle of central park the minute that it looks like it's gonna rain these street vendors double the price of their umbrellas and this simple doubling of price illustrates three key points about pricing first pricing has very little to do with your cost you know your costs haven't increased, but your price has gone up.

22:37Second, price is all about your customer's next best alternative. So if I'm in the middle of Central Park, it's about the rain. My only option is to run 10 blocks to CVS and hope I can get an umbrella before it rains. And the third and most important point is the key to pricing is to think like your customers. And your customers are in the middle of Central Park. They're willing to pay a premium over the next best alternative. And it's understanding what makes your product or service so unique and then setting a price to capture the value of your uniqueness. Rafi, thanks for coming on the show to talk about this.

23:15Kurt, I appreciate it. It's been fun.

23:18Rafi Mohammed:That's Rafi Mohamed, founder of Culture of Profit, a pricing consulting firm, and the author of The 1 % Windfall, How Successful Companies Use Price to Profit and Grow. You can find more of his work at hbr.org.

23:37Rafi Mohammed:This episode was produced by Mary Du. We get technical help from Rob Eckhart. Adam Buchholz is our audio product manager.

23:48Rafi Mohammed:Thanks for listening to the HBR IdeaCast. I'm Kurt Nikisch.