Navigating value-based pricing amid the challenges of hybrid-flation requires a strategic approach. While it may pose difficulties, it is certainly achievable, especially with well-established capabilities. Despite the evolving landscape, the fundamental toolbox and principles remain constant. This paper advocates for heightened preparation and discipline when confronted with requests for price reductions. Stephan M. Liozu, Ph.D. (sliozu@gmail.com), is Founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, XaaS pricing, and value-based pricing. He is also the co-Founder of Pricing for the Planet, which specializes in pricing for sustainability. Stephan has 30 years of experience in the industrial sector with companies like Owens Corning, Saint-Gobain, Freudenberg, and Thales. He has authored and edited 14 books on value and pricing management. Stephan sits on the Board of Advisors of Professional Pricing Society. He is a Senior Advisor with BCG and Black Winch.

The Pricing Advisor, May 2024

The most challenging phase is now behind us. Inflation has subsided to a manageable level, bringing a sense of relief as we navigate a return to normalcy. While some are reverting to business as usual, for buyers and procurement agents, it marks a shift – it’s payback time. Following consecutive quarters of pricing escalations fueled by high inflation, they are poised to reclaim lost margins.

With stabilized supply chains, a slowdown in growth, and the onset of geopolitical turbulence, the landscape has shifted. Even the SaaS sector is undergoing a period of humility. As we find ourselves in a more “normal” Consumer Price Index (CPI) and Producer Price Index (PPI) zone, it’s crucial to note that we aren’t necessarily experiencing deflation but rather a state of hybrid-flation.

For numerous companies, the last two years served as a resounding wake-up call. Faced with no alternative, they had to implement widespread price hikes, often multiple times a year. These increases took center stage in corporate operational plans and became highly visible in executive suites.

Presently, a global cooling trend is noticeable. Certain sectors have witnessed significant price reductions. While we aren’t entirely out of the challenging phase, there is a general trend of what ascended now descending. Consequently, customers are experiencing an upswing in purchasing power, reclaiming a position of influence.

One might assume that pricing and commercial teams are prepared for this anticipated boomerang effect. However, that’s not entirely accurate. Many organizations have honed their skills in handling price increases but overlooked the importance of a robust strategy when prices decrease. In previous publications by the Professional Pricing Society (PPS), I emphasized the necessity of a disciplined approach to managing both pricing increases and decreases. Failing to address cost reductions and escalating price pressure during downturns can lead to the following pitfalls.

1. Giving away your cost structure and cost information to customers:
2. Sharing the intimate value rationale with customers.
3. Not respecting contracts, agreements, and formula-based clauses.
4. Panicking when facing threats and giving in to requests on the spot.
5. Leaving all responsibility to manage discount requests to sales.
6. Not responding to irrational requests with educated and robust data.
7. Disappearing and playing dead!
8. Using the corporate shield and not giving timely answers.

A stark reality confronts us. If your pricing strategy has been entirely cost-driven, and your communication during the inflationary period focused solely on cost, customers now anticipate the same cost-centric approach as inflation subsides. By consistently emphasizing your cost drivers, you’ve educated customers on your cost structure, prompting them to seek concessions.

Managing value-based pricing when costs are decreasing and buyers are pressuring for lower prices can be challenging, but it’s essential to maintain profitability and capture the value you provide. So, it is going back to value basics with some strategies to consider:

1. Focus on Value Communication:
   • Reinforce the communication of the unique value propositions and benefits of your product or service.
   • Emphasize the positive impact on your customers’ business, such as increased efficiency, enhanced quality, or reduced risk.
2. Customer Education:
   • Educate your customers about the value they receive beyond the product itself.
   • Repeat the overall impact on their business operations, cost savings, and long-term benefits.
3. Segmentation:
   • Refresh your segmentation in the context of the recent pricing pressures.
   • Identify customer segments that highly value your unique offerings and are willing to pay a premium.
4. Bundle Value-Added Services:
   • Bundle your core product or service with additional value-added services that align with customer needs.
   • Inject more value into current packages and versions of your offers.
   • Quickly innovate in new business and revenue models.
5. Differentiation:
   • Invest in short-term innovations to differentiate your offerings from competitors. Unique features or improvements can justify maintaining prices.
   • Refresh your value maps to evaluate your performance/price position.
6. Dynamic Pricing:
   • Implement dynamic pricing strategies based on customer behavior, demand fluctuations, or changing market conditions. This allows you to adjust prices in response to various factors.
7. Negotiation Skills:
   • Equip your sales teams with negotiation skills to effectively navigate discussions with buyers in the context of price reductions.
   • Emphasize the value your product brings and be prepared to articulate it convincingly. Focus on value-based selling even more.
8. Monitor Market Conditions:
   • Stay informed about market trends, competitive offerings, and short-term changes in customer preferences.
   • Adjust your pricing strategy accordingly to remain competitive while preserving value.

Remember, the key is to align your pricing strategy with perceived value in the eyes of your customers. Regularly reassess and adjust your approach based on market dynamics and customer feedback.

Using Principles of Value-based Pricing During Deflationary Times

When prices are going down, it is inevitable that price concessions will happen. The key is to protect margin on the way down – especially to more cost-sensitive offers. For very differentiated solutions, it is reasonable to expect that prices remain stable considering the tremendous value they deliver. Generally speaking though, salespeople will come under pressure very quickly to reduce prices. This is when the price decrease management process kicks in. The process needs to inject discipline into managing discount requests. For that, the overall goal is to protect margins while anticipating that our costs will decrease more than our prices. Collaboration between procurement, pricing, and finance teams is essential when establishing discount guidelines in the context of price pressure.

The pricing team is the main driver of the value and pricing inputs that inform discount decisions. They must reinforce the key principles of value-based pricing with margin protection in mind. Practically, it means the following activities.

• Refresh customer value maps and models weekly.
• Focus on the exchange between price and value in all discussions.
• Track market prices and cost changes daily.
• Maintain established value-based premiums vs. competition.
• Master price discretion and value pool sharing in teams.
• Develop relevant value simulators to offer real-time guidelines to sales.
• Establish a value and price war room to act quickly.

The pricing team must reinforce the robustness of the value toolbox in order to avoid moving back to cost responses and to focus even more on value messages when concessions are asked.

Responding to Price Concession Request Based on Cost

Responding to price concessions based on value and differentiation requires a strategic and communicative approach. Here are some steps to consider:

1. Reiterate Value Proposition:
   • Clearly articulate the unique value propositions and differentiators of your product or service. Emphasize how these features directly contribute to the customer’s success and why they justify the current pricing.
2. Quantify Value:
   • Quantify the value your product or service provides. Use data and metrics to demonstrate the impact on the customer’s bottom line, such as increased revenue, cost savings, or improved efficiency.
3. Customer Education:
   • Educate the customer on the comprehensive benefits they receive beyond the basic features. Help them understand the long-term advantages and positive impact on their business.
4. Customized Solutions:
   • Explore options for customized solutions that align with the customer’s specific needs. Tailor your offer to maximize value while addressing their concerns about pricing.
5. Showcase Success Stories:
   • Share success stories and case studies of other customers who have realized significant benefits from your product or service. Real-world examples can be powerful in demonstrating value.
6. Negotiation on Other Terms:
   • If the customer is adamant about a lower price, consider negotiating on other terms, such as payment schedules, delivery terms, or extended contracts. This allows you to maintain value while providing some flexibility.
7. Flexible Pricing Models:
   • Introduce flexible pricing models that align with the customer’s preferences. This could include tiered pricing, subscription models, or performance-based pricing.
8. Quantify the Impact of Concessions:
   • If you need to make concessions, quantify the impact on your end and communicate this transparently. Ensure that any adjustments made do not compromise the sustainability of the partnership.

Remember, effective communication is crucial. Be prepared to have open and transparent discussions with the customer, focusing on the mutual benefits of the partnership.

The focus lies in managing the discounting process in response to pricing objections. When faced with a significant challenge, it’s not a question of whether to offer a discount, but rather determining the extent of the concession required. After experiencing a prolonged period of pricing increases due to rising costs and inflationary pressures, customers are now anticipating concessions. There are two primary guidelines: 1) refrain from providing a discount or concession without receiving something in return, and 2) discount below the internal cost decreases to safeguard the margin.

Boosting Value-based Selling Skills

Establishing a price decrease management process rooted in customer value necessitates a substantial enhancement of value-based selling training for the sales force. While they have undergone value-based selling training as part of the commercial excellence programs, gearing up for price concessions within the framework of value-based strategies demands additional focus. Specifically, there is a need for more training on the value toolbox, empowering the salesforce to adeptly maintain margins and resist the temptation to discount through effective utilization of value-based selling techniques.

When costs are decreasing after a prolonged period of inflation and buyers are pressuring for price decreases, it’s essential to align the conversation with the changing economic landscape. Here are examples of scripts for different scenarios:

Scenario 1: Acknowledging Cost Changes

Buyer: “We’ve noticed a decrease in market prices. Can we expect a reduction in your prices?”

Response: “We appreciate your attention to market dynamics, and we understand the importance of cost considerations. While market conditions have seen a decrease in prices, it’s important to note that our commitment to delivering exceptional value remains unchanged. However, we are open to discussing how we can optimize our pricing structure to better align with current economic trends. Let’s explore ways to ensure you continue to receive the best possible value from our partnership.”

Scenario 2: Highlighting Continued Value

Buyer: “Given the decrease in costs, we expect a reduction in our pricing.”

Response: “We’ve indeed observed the shift in market trends. I want to assure you that our focus remains on delivering top-notch quality and service. While there might be a decrease in costs, our commitment to providing value and innovation is unwavering. Let’s discuss how we can enhance our partnership and explore avenues to optimize our pricing structure without compromising the unique advantages our solution brings to your business.”

Scenario 3: Leveraging Efficiency Gains

Buyer: “Other vendors are adjusting their prices. Can you do the same?”

Response: “I understand that market dynamics are evolving, and we appreciate your diligence in seeking the best value. As we navigate these changes, it’s important to note that our recent efforts have resulted in increased operational efficiency and cost savings. While we’re open to discussing adjustments in our pricing, let’s also explore how our ongoing commitment to efficiency gains can further benefit your organization beyond just pricing.”

Scenario 4: Offering Value-Added Enhancements

Buyer: “We’re looking for cost reductions. How can you accommodate that?”

Response: “We understand the importance of cost efficiency for your organization. While our pricing reflects the value we bring, we’re also eager to enhance your experience. In addition to exploring potential adjustments in pricing, we can introduce additional value-added services or features at no extra cost. This way, we ensure that your investment continues to deliver a comprehensive and competitive advantage.”

Scenario 5: Collaborative Cost Optimization

Buyer: “Given the market trends, we need a reduction in pricing. What can you offer?”

Response: “We appreciate your awareness of market shifts, and we are committed to maintaining a partnership that reflects current economic realities. Let’s collaborate on a comprehensive cost optimization strategy. This could include exploring ways to streamline processes, enhance efficiencies, and, if feasible, adjust our pricing structure to align with the evolving market conditions. Our goal is to ensure a win-win situation for both parties.”

Remember to customize these scripts based on the specifics of your industry, product, and the nature of your relationship with the buyer. These scripts must be part of the value-based selling training done to manage price concession requests.

Concluding thoughts

Navigating value-based pricing amid the challenges of hybrid-flation requires a strategic approach. While it may pose difficulties, it is certainly achievable, especially with well-established capabilities. Despite the evolving landscape, the fundamental toolbox and principles remain constant. This paper advocates for heightened preparation and discipline when confronted with requests for price reductions.

In the current scenario, as inflation begins to recede, there is a critical need to develop and implement robust processes. Presently, most companies find themselves dealing with both price increases and decreases simultaneously, intensifying the dynamics and complexities of the pricing landscape. Fortunately, pricing teams possess the requisite skills to handle this intricate situation. To initiate the process, it is essential to establish a framework and involve key stakeholders, including finance, procurement, and sales teams.