Many companies are now revising pricing strategies to build resiliency for the aftermath of COVID-19. Companies that refine their pricing strategy with foresight in 2020 will set the stage for a stronger recovery and long-term growth as the crisis abates. In this article, the authors present a roadmap for redeveloping pricing strategy based on insights into three key areas. Sudipto Banerjee (sudiptobanerjee@KPMG.com) is Principal at KPMG where he leads the Commercial Excellence and Pricing practice. Serena Crivellaro (scrivellaro@kpmg.com) is Managing Director at KPMG specializing in pricing, sales, and marketing strategy optimization.

The Pricing Advisor, July 2020

Many companies are now revising pricing strategies to build resiliency for the aftermath of COVID-19

COVID-19 changed the mindsets and behaviors of hundreds of millions of people in a matter of weeks. As the world continues to fight the virus, nearly every business will need to adapt to sharp shifts in demand patterns, low consumer confidence, and the effects of social distancing. While some industries are now facing severe slumps in demand, others are experiencing a dramatic increase. Few are unaffected, and we expect volatility to continue for at least the rest of 2020.

Many companies have cut prices to address immediate challenges, such as volume and share erosion, while others are raising prices to account for temporary shortages of raw materials, parts or labor. Many vexing questions about pricing that confront business leaders vary not only across industries and companies but across product lines, across channels in the same product line, and occasionally for a single customer buying different products.

These temporary price adjustments, however, will not be enough to help many companies withstand a prolonged health crisis and a global recession. We believe that to build resiliency and succeed in the longer term, most companies will need to fundamentally reconsider pricing strategy.

They will need a current and detailed understanding of the structural changes brought on by COVID-19 and how those changes will affect their industry, customers and competitors. In short, they will need more foresight to navigate a landscape in turmoil.

In our experience, effective pricing strategy creates advantages through variations in demand and competitive position. A thoughtful pricing strategy can also help companies demonstrate empathy and build trust with customers and other stakeholders. We recommend building a long-term pricing strategy based on insights into three main areas:

• Shifts in customer demand by product line, end market and channel
• Relative competitive position within product lines, end-markets or channels
• Demonstrations of genuine empathy that build trust and enhance brand perceptions

Once companies develop insights on these three dimensions, they can choose the appropriate pricing approaches to maximize long-term value. As the exhibit below shows, we recommend specific responses for companies depending on their competitive position and the level of demand in the industry. A strong competitor in a fast-growing market, for example, should take ethical pricing actions and avoid profiteering.

Pricing Strategy Framework

How companies have used the four approaches to pricing during COVID-19

To understand how to apply the four pricing tactics in our model now, we looked at examples of what companies have done since COVID-19 began. This includes examples of what not to do; some firms have focused mainly on short-term goals, such as slowing declines in revenues or market share, making pricing mistakes that could have lasting consequences. Companies that are taking a long-term and truly strategic perspective — including many of the companies in industries where demand has risen — maintain focus on customer relationships and brand perceptions, which take a long time to build but can be squandered quickly.

Here are examples of the four approaches in practice now:

Pricing under the umbrella

As billions of people around the world stayed home to prevent the spread of the virus, demand for streaming video services spiked.1 Leaders such as HBO and Sony Pictures, along with some smaller players, responded by offering some free content or extended trials.2 They may intend to drive awareness, encourage purchase and capture share, but “pulling forward” demand in this way could create a trough in future sales as viewers exhaust the most appealing content and get off the couch as quarantines are lifted.

HBO’s “fenced-in” trial — featuring specific series for a limited period – is a masterclass in using discounts to convert a short-term demand bump into longer-term customer relationships and share gains. Non-dominant players attempting to use such an approach should be careful not to start price wars that bigger competitors have the resources to win.

Social distancing has made access to golf courses a rare commodity, but course operators are generally limiting price increases even though they typically rely on dynamic pricing models. We believe this is a sound strategy; while a golf course may have a captive audience among dedicated golfers or within small geographies, golf is only one of several recreation and sporting options. In this scenario, cautious price increases can help preserve long-term customer relationships, including membership or season pass renewals where applicable.

Ethical pricing as a competitive advantage

As millions of people began working and studying remotely, demand jumped for consumer and professional video conferencing. Rather than raise fees to make the most of the situation, one company did the opposite, expanding its free services. This “ethical pricing” earned it ample goodwill that may spur loyalty and prompt more users to purchase licenses.

A major software company is playing the long game with ethical pricing by providing students with free access to some products through the end of the school year. It is also offering free temporary access to one of its lesser-known business tools to current and new customers.

LVMH stopped manufacturing many of its luxury products during the pandemic, thereby maintaining scarcity, avoiding a buildup of unsold stock and supporting high price points. Indeed, according to news reports, the company raised prices on some of its Louis Vuitton handbags and clothing by 5 to 17 percent as sales began to pick up in April.3 It also mobilized its perfumes and cosmetics production facilities during the pandemic to make hand-sanitizing gels to distribute – free of charge – to hospitals and front-line organizations in France. This humanitarian gesture should help build goodwill for the house of brands.

Discounting with discipline

In sectors where demand has fallen sharply, companies are experimenting with a wide range of approaches to protect brands, revenues and market share. Based on our experience and research, we expect that those who maintain discounting discipline will have the strongest long- term results.

In the highly competitive auto insurance industry, where no carrier’s market share exceeds 18 percent, leading companies including Allstate, Geico, and Progressive offered similar discounts (15 to 25 percent) for March and April premiums, reflecting a sharp drop in driving and accidents. Offers like these can reduce churn, build goodwill and even take share from less flexible competitors. The most disciplined insurers won’t destroy value with these offers: their discounts will not exceed what they expect to save on claim payments.

Smaller companies are taking creative approaches to pricing in the crisis, too, including gyms, hair salons and restaurants. Some are offering discounts on gift cards to be redeemed for future services, offering “power-ups” for refunds converted to store credit, or conversely hosting good-hearted “bidding wars” for the first appointments once businesses re-open, with the funds going to staff who have been unemployed for weeks or months.

Revisit pricing and go-to-market strategy

Where demand has fallen, businesses with strong market shares or competitive positions may feel their hands are tied. We urge them to look beyond price points to revisit the broader pricing strategy. What valuable elements can be disassociated from the old offer and sold separately, for example? How has the value of each element changed during the crisis? Leading companies across industries are making headway with fresh go-to-market strategies:

• Leading auto manufacturers and online sellers such as Carvana are reducing or waiving monthly car or lease payments for customers facing financial strain. Most of these offers are for a limited period or cap the waiver amount, or available only to customers who have

lost their jobs. Others are not lowering prices but are offering interest-free financing or free add-ons.

• Sephora and other large cosmetics manufacturers and retailers are seeing steep sales as house-bound customers use less make-up. In response, some companies are accelerating a pivot towards skincare and considering other adjustments. For example, the purchasing experience may also need to change: in- store testers may be replaced by virtual try-ons.

The value of trust and empathy

In times of crisis, trust and empathy are more important than ever. In the current economic downturn, shoppers appear to be using more coupons and comparing prices more often, but many are also sympathetic to people in trouble and more willing to tip.

At the same time, consumers are less willing to overlook what they consider predatory behavior. Early attempts at price-gouging and profiteering became front-page news, and the backlash was swift and harsh. Facing outrage from lawmakers and the public, Frontier Airlines quickly scuttled a plan to charge passengers $39 or more for social-distance seating. The airline quickly apologized and rescinded its “More Room” offer. People who are suffering economically may not soon forget companies that tried to take advantage of sudden scarcity or an urgent need.

As we have shown, many companies are showing empathy, building trust and strengthening their brands and long-term customer relationships during this difficult period. In addition to helping customers in need, some consumer-facing companies, such as mobile carriers, have offered assistance and billing leniency to first responders.⁴

B2B companies are focusing on helping their channel partners, which are often vulnerable small- and medium- sized businesses. Some insurers, for example, are supporting a trust fund established by an industry trade group to help independent insurance agencies and brokerages.

In short, the biggest opportunities in this crisis may be to strengthen trusting relationships which will endure long after the recovery.

Next steps

We urge clients to take four steps to adapt their go-to-market approaches to today’s volatile and uncertain economy:

Demand will shift across products, sectors and channels, and each unique competitive position may require different pricing responses. A thorough review of the landscape, including how it has been impacted by the crisis, will provide a foundation for demand planning, scenario forecasting and thinking through risks and opportunities as the situation evolves.

Take stock of the new environment

Making price changes quickly can help recover lost ground and seize opportunities. But this is a moment to be especially sensitive to perceptions; we recommend that companies track customers’ reactions carefully and adjust policies accordingly. Senior leaders and sales teams may need to work closely with Legal to manage the risks of changes in terms and conditions. Clear pricing governance and reporting can put guardrails around price changes to help manage risk, especially for a remote sales force.

Move quickly, but with caution

Keep in mind that customers are struggling, too. Clearly explain any changes to pricing, discounting and credit policies, including specific qualification guidelines, when and how credit will be applied, when the new terms will end (or be reassessed), etc., to help clients plan their purchasing decisions.

Communicate, communicate, communicate

Consider how pricing needs to evolve to meet strategic goals in the new environment. Pricing moves for each product, customer segment and channel should be building blocks in a coherent strategy that addresses individual nuances without breaking the portfolio.

Refine pricing strategy

Companies that refine their pricing strategy with foresight in 2020 will set the stage for a stronger recovery and long- term growth as the crisis abates.