Pricing in a Time of Uncertainty
COVID-19 is overturning a lot of our basic assumptions about how we live, what we can expect and how we organize our lives. None of us know how this will play out.
Is this a short-term dip where things will return to normal by the end of the year? Could be. Will the time it takes to produce a vaccine mean we need to prepare for a longer crisis that will tip the world economy over into a recession? Also possible.
Or will something fundamentally different happen? Will the experience of social distancing (I didn’t even know what this term meant six weeks ago) and the economic shock lead to a more basic change to behaviors?
If the pandemic is short enough, say 3–9 months, we may see new baselines emerge for the established. In the most extreme scenario, where the pandemic is prolonged and several healthcare systems are overwhelmed, we may experience more fundamental change in which the ways we measure our lives, societies and organizations change.
In this uncertain environment, how should one approach pricing?
The first thing to do: Find moral grounding
Ethics matter in a crisis. For pricing, this means no price gouging.
We should not take advantage of short-term fluctuations in demand or panic buying. Supplies need to be managed so that they go to the people who need them most. Masks and gloves to frontline healthcare workers. Food deliveries to people who are the most isolated and vulnerable.
People will remember the companies that make ethical choices and those that do not.
Relationships will matter no matter what happens
Communicate with your customers and make sure you understand how the pandemic is impacting them personally, their business and their customers. No one understands all of the implications of the pandemic, and the only way to find out is to ask and to listen.
You’re listening for changes in value drivers, the value that you’re providing your customers and the value that your customers are providing to their customers. Emotional, Economic and Community value drivers all matter, but for the short term it is emotional and community value drivers that will come to the fore (learn more about value drivers here). Make sure you understand how these are changing.
Don’t offer discounts
There’s going to be pressure to offer discounts. Resist this pressure. Instead of offering discounts, look at making concessions on terms of trade. Defer payment terms if you can. Allow customers to carry volume commitments forward.
If there’s a serious drop in use due to the pandemic, consider extending the subscription for a period of months. If you fail to acknowledge the current economic conditions, as reflected in the use of your service and the value it delivers, you may contribute to higher churn. In uncertain times, you want to be doing what you can to reduce churn.
Price helps anchor your value, and price discounts made during a crisis tend to stick and can reset value perceptions long term.
If you don’t already have one, add a usage component to your pricing model
Now’s the time—this is one of the best ways to align with value. In a time where there’s a great deal of uncertainty, connecting price through use to value can be a winning play.
Experience in previous downturns suggests that cost-side value drivers are more compelling than revenue growth value drivers. When the economy is contracting, buyers are looking for ways to cut costs and are skeptical about claims that a product or service will help to grow revenues. Look through your list of value drivers and sharpen those that impact your customers’ costs.
You’ve started worrying about churn. So have your customers.
If you define value drivers based on how you impact unit economics (Customer Acquisition Costs, Lifetime Value of a Customer and so on), take a close look at everything you can do to help your customers reduce or manage their own churn.
Think widely about churn. For example, if you have an HR or talent platform, the equivalent of churn is retention. As people transition to social isolation and working from home, how does your platform impact churn?
Your value proposition is most compelling when it combines emotional, community and economic value drivers. Spend some time looking at the combination of value drivers that will resonate in a time of great uncertainty. If you’ve never used community value drivers (most companies have not), start layering them in.
- Who beyond my users benefits from use of my solution?
- How do they benefit?
- Do these benefits feedback and help my users?
Economists would frame this as searching out positive externalities. Of course, if you’re going to start claiming positive externalities, you also need to look at any negative externalities your solution may have.
Negative externalities are costs that your solution imposes on non-users for no compensation. Companies in the sharing economy have been accused of generating massive negative externalities. In the present situation, expect people to pay close attention to any negative externalities that could make the pandemic worse and demanding action.
The biggest opportunity may be around helping your customers manage risk. Look back up at the four scenarios sketched at the top of this post. Any one of those scenarios could play out, and all are likely to play out in one industry or another. That means risk.
Conventionally, risk value drivers are used mostly for industries that have formal and quantitative approaches to manage risk, like finance, energy, insurance and real estate. More and more industries will be adopting formal risk management programs. This is a big opportunity, first of all for companies selling risk management and mitigation, and then for all of the companies that offer products and services that can help reduce risk.
Look through your customer base. What are the main risks to each of your customers from the fallout of COVID-19? How can you reduce risk?
5 rules to help you manage pricing through the COVID-19 pandemic
- Do not discount. Use other concessions as necessary
- Layer usage metrics into your pricing model to better align with value
- Focus on economic value drivers for cost and risk
- Build a holistic value proposition that include emotional, economic and especially community value drivers
- Plan for more than one possible future
Above all, stay safe and support your family and community. We are all in this together.
But don’t let that keep you from making incremental changes that set you up to scale to $100+ million ARR in the long run.