Insight

Pricing and discounting during COVID-19

The threat of recession in the U.S. has gone from theoretical to real.

Serena Crivellaro

Serena Crivellaro

Managing Director, Strategy, KPMG US

+1 212-954-7468

Sudipto Banerjee

Sudipto Banerjee

Principal, Pricing & Commercial Excellence Leader, KPMG US

+1-404-907-6173

March 18, 2020

 

In anticipation of a possible recession, we recently published the paper, “How to maintain sales and pricing discipline in a downturn.” Then, COVID-19 hit. This unprecedented situation is evolving daily, but it is becoming clear that in addition to the tragic health impact, the coronavirus will have severe economic consequences. The threat of recession in the U.S. has gone from theoretical to real.

In this blog post, we lay out some urgent pricing and sales considerations for companies facing difficult demand and supply scenarios during this crisis.

In the short term, many businesses will face declines in demand due to mandated restrictions on movement, travel, and social gatherings (e.g., hotels, flights, restaurants, car rentals, etc.), and voluntary cuts in spending from customers grappling with uncertainty. This will likely affect apparel, investment goods, large capital expenses, etc.

In this situation, it is paramount to:

  • Maintain discounting discipline to avoid the downward price spiral that happens when companies start chasing sales. Instead of reflexively cutting price, focus the customer conversation on the total value package of your product. Consider flexible terms and conditions, generous return policies, or including additional services to increase your total value proposition.
  • Build sales muscle. Remote working still allows opportunities to build your sales force’s skills through virtual training and mentorship. Invest any quiet time in revamping sales policies, marketing materials, and other infrastructure.

What about raising prices? In some categories there will likely be upward pressure on pricing due to strained supplies—due to supply-chain disruption or inability to produce due to employee absences. The rush by consumers to stock up on supplies to weather the outbreak is causing shortages and raising prices of toilet paper, baby formula, cleaning products, and canned goods. It is also raising demand for freight and delivery services, etc.  

While these circumstances may provide opportunity to increase prices, leaders should consider the long-term brand impact of such moves. In addition to possible regulatory intervention, consumers and businesses will notice which companies showed empathy and which did not–and this may impact future business.  

We believe it is more important to:

  • Build a dynamic-response model, using true market signals to identify relevant data points and avoid panic-induced price setting. This ensures that your prices are market appropriate and don’t alienate customers—but also reflect your inventory and cost situation.
  • Know your customers. Prioritize stock, services and pricing (where appropriate) for buyers who will reward you for it with long-term loyalty. This may involve putting limits on individual customer purchases to protect an entire customer segment.

As the virus is eventually contained, businesses may experience a sudden drop in demand. This may be far more pronounced for non-perishable goods that customers are stockpiling now, since they are merely bringing forward future demand. During such a dip, we suggest holding fast to the best-practice principles, such as maintaining discounting discipline.

In our paper, we outlined five steps to take before an economic slowdown. The lead time for preparation has suddenly shrunk. Moreover, companies now must deal with the immediate effects of social distancing and employee health concerns on the ability to produce—remote working, disruptions in childcare, etc.

If the crisis takes many months to resolve, sellers may need to find new ways to accommodate buyers. There may be demand for new offers, such as digital alternatives to in-person services; off-peak service models for customers balancing home working and childcare; using remote diagnostics to avoid service calls, etc. 

Business leaders should be open to feedback from employees and customers on evolving market needs. Be ready to quickly develop the sales support structures to push new ways of serving customers into the market.

For additional details on pricing in a recession, please review our full report, or feel free to reach out to us with any questions.