The shifting economic outlook for small and midsized businesses (SMBs) has resulted in a commensurate shift in the optimal focus areas of business transformation initiatives for these companies. In the early days of the coronavirus pandemic, there was concern that as many as 1 million SMBs could fail. Luckily, government intervention softened the blow for many companies, and the public health outlook improved considerably. The end result has been that only 100,000 to 200,000 US SMBs failed as a result of the pandemic. Unfortunately, the economic impact of the coronavirus pandemic has still been extraordinarily severe for SMBs, and their long-term survival is by no means assured (see Exhibit A). Now, those companies that successfully navigated the disruptions of the last 18 months must turn their attention to the challenge of driving a successful business transformation that will allow them to survive and thrive in the recovery. One avenue for strengthening financial performance post-COVID is as simple as it is profound: pricing strategy.
Source: “2021 Global State of Small Business Report”, Facebook and the Small Business Roundtable, April 2021.
What Pricing Communicates
The price a company charges for the goods or services it provides relays important information to current and prospective customers, and as such a strategy to optimize that value is a powerful lever to drive business transformation. The quality of an offering will speak loudly, but it will only speak to actual customers. Prospective customers will not have the benefit of direct experience with your product or service, and so will tend to draw inferences from the relative pricing of your offering vs. those of your competitors. The danger for companies is that a high-quality offering with a mid-tier price will tend to be viewed as a mid-tier offering absent a concerted messaging strategy. Any successful pricing strategy must strive to avoid a myopic focus on a company’s own offerings and instead seek to be conversant in the trends ongoing in the broader market.
Thinking About Pricing Holistically
The global consulting firm BCG outlines four key gaps in how organizations think about pricing:
- Strategy. The absence of a well-defined pricing strategy puts organizations at a disadvantage.
- Execution. Success in pricing requires a commitment from company leadership to the discipline of regularly evaluating prices and making appropriate adjustments.
- Tools & Insights. Marshalling the appropriate data and applying insights generated through analytics tools can allow companies to develop and test pricing models that will improve over time.
- Organization. Having the right people, in the right positions, properly incentivized, to drive pricing strategy is key.
A successful business transformation effort premised on optimizing pricing strategy must address the gaps outlined above.
Too often, SMBs approach their pricing decisions out of fear. The following are some of the most common pricing traps:
Buying business. By intentionally pricing low some companies seek to establish a sales “floor” for the company. Unfortunately, this approach necessitates a level of financial sophistication and forecasting that exceeds the capabilities of many of the companies who practice it. In the absence of these capabilities, a strategy of buying business becomes a strategy of being a low-cost provider, which often siphons away the profitability that would otherwise allow a company to invest in developing higher quality, and higher priced, offerings.
Stagnant pricing. In many ways, this is similar to #1, but more insidious. The pricing was originally fine, comparable to market peers, etc. But over time, and in the interest of staying in the good graces of a major customer, pricing increases are pared back or avoided entirely. As a result, over time good pricing becomes bad, or disadvantageous pricing. And formerly “good” customers come to understand that your fear is a key input in their price.
Loss leaders. Goods/services priced at a loss with the intention of using that low price offering as an opening to sell other, higher priced goods and services. This approach can often fail companies when sales teams, incentivized to maximize revenue and not some measure of profit or cash flow, fail to drive sufficient volume of additional goods or services to make this approach viable.
Actual pricing. Sometimes the list price is fine, even attractive, but a lack of internal controls may allow the sales team to grant or the customer to negotiate, discounts that severely undermine the original unit economics.
Ignorance. Simply being unaware of how your pricing works at the level of each individual customer and offering is a trap, and often, the costliest of them all.
The coronavirus pandemic was massively disruptive to small and midsized businesses, but all indications suggest that the recovery and attendant adjustments to it could be even more so. The companies that thrive in the recovery will be those who embark on business transformation efforts focused on a critical reexamination of business practices, core assumptions, and even long-term goals, all in the interest of initiating a virtuous cycles of value creation. For business leaders seeking such opportunities, pricing strategy is a good place to start.
About the Author
David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition. Over the course of his career, David has served as financial advisor and interim executive to dozens of middle market companies. He is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. David can be contacted at: firstname.lastname@example.org.