The Value of Price Optimization in a Recession

A continuously evolving tariff policy has markets on edge, and rising prices and inflation fears have soured consumer sentiment, prompting some economists and Wall Street power brokers to say a recession is likely. It takes a rearview mirror look at two-quarters of GDP decline to identify a recession, so we won’t know for some time yet if the supply chain is experiencing one. However, most roads point to an economic downturn.

How can your organization navigate the disruption and protect your financial position? The right pricing strategy with timely execution makes all the difference.

Ensure long-term resilience

Price optimization is the process of deciding the most effective price for a product or service at any moment, even in volatile times. It’s how organizations find the optimal price customers are willing to pay for a product: not so high that they risk losing that customers’ business, not so low that they sacrifice margin. It’s exactly the right price for the right product for the right customer at the right time. Market volatility will come and go, but disciplined price optimization ensures long-term profitability and resilience.

Pricing software for manufacturers and distributors handles all the data required to optimize prices, automate pricing analytics, and easily execute pricing changes — both list prices and negotiation guidance — across the organization. As costs fluctuate and customer behaviors change in response to market volatility, pricing technology supports more efficient, profitable decision-making.

Successful price optimization strategies will vary from company to company and even product to product, but almost always, the core ingredients include a strong understanding of your customer base and access to real-time insights that ensure your team no longer relies on guesswork or quick reactions to news of the day.

5 steps to start

It may seem safer to ride out market volatility by waiting for better times. But savvy manufacturers and distributors have learned that now is the time to analyze the data, reassess current practices, and keep the focus on long-term profitability. Start with these five steps.

1.      Gain a deeper understanding of your customers

If your business is experiencing hard times, your customers are likely feeling the pinch, too. Rather than slashing prices and processes in response to a storm on the horizon, examine your products’ needs-based and psychological buying data.

Why do your customers purchase your products? What void or need do your customers fill in good times and bad? Is your product easily replaced by a cheaper competing product? How recession-resistant are your customers? How do your products help your customers create value? Answering these questions will help your product and pricing teams better plan and implement strategy changes.

2.       Consider your products’ perceived value

With a better understanding of your customers, it’s also important to stay informed about any changes in your product’s perceived value. History tells us a recession can drive down value or, depending on the product, it could increase it. (Remember when the pandemic drove everyone to buy more toilet paper?)

What key market dynamics have changed? How do different customers use the same product? What substitute products are they evaluating? Try to anticipate how that use could change during a recession. Devise a pricing strategy and plans for change if perceived value evolves as key market dynamics change.

3.       Adopt a value-based pricing strategy

In a downturn, customers naturally become more price sensitive. Reacting to this by slashing prices could hurt brand positioning and/or start a price war among your competitors. Instead, implement a value-based pricing strategy that sets prices based on your customers’ perceived value. It includes segmenting customers based on their willingness to pay. Consider how you are packaging your products and servicing your customers as well.

4.       Get your financial house in order

In a booming economy, doing business with marginal customers who buy products at marginal levels is common. But as an economic downturn approaches, it’s time to get your financial house in order. Who makes you money? Who is a drain on your profitability? While you address superfluous spending and maintain a cash buffer while securing long-term lines of credit, keep a close eye on your customers and identify actual pocket margin. Find a way to serve those marginal customers profitably or reconsider the relationship. With the right technology, the right data, and deep customer understanding, you can quickly find ways to protect and improve your profitability.

5.       Uncover revenue and profit leakage

During a downturn, it’s natural to either preserve volumes by discounting prices or offset cost hikes by increasing prices. But there is another option: keep the current price levels by removing the non-essential features that defend profitability by preserving volumes or unit margin.

Consider where revenue and profit leakage might occur and where you could be leaving money on the table. This might mean unbundling services like weekend deliveries and itemizing those services separately rather than including them for no charge. Clearly call out things that add real value, like product availability levels.

The cornerstone of successful price optimization efforts is quality data. What you know about each customer and your ability to quickly execute changes based on evolving perceived value and willingness to pay are critical to profitability today and resilience in the long term.