In times of economic uncertainty, businesses face myriad challenges, from plummeting demand to cash flow constraints. However, one area that often gets overlooked during a recession is pricing strategy. According to Deloitte research, firms that raised their pricing during a recession were 2.5 times more likely to lose market share than those that maintained their prices. On the other hand, companies that reduced their prices during a recession witnessed a 27% rise in market share.
The same report says that companies focusing on pricing during a recession outperform their rivals regarding sales growth and profitability. During the 2008-2009 crisis, for example, firms that employed pricing strategies saw an average 2-5% improvement in operating profits. Companies that did not apply price strategies saw their operating margins fall by an average of 1-3%.
Zoom was one of the companies that successfully navigated this challenging environment during the COVID-19 pandemic.
Zoom initially raised its cost for larger enterprises to satisfy the rising demand for its product. It soon changed its strategy to provide discounts and flexible pricing plans to small and medium-sized enterprises, schools, and non-profit organizations. But, they were also under pressure to give free or subsidized services to pandemic-affected clients.
To address these issues, Zoom employed price tactics such as providing free services for a limited period, providing discounts for longer-term memberships, and developing various pricing plans to fit different client segments. Zoom's revenue increased by 355% in the second quarter of 2020 compared to the same time in 2019.
The company’s updated pricing approach was bolstered by product features such as free platform access for up to 40 minutes and more flexible payment choices. It also improved its market share during a challenging period by offering various price options that catered to the demands of different client segments.
This approach not only assisted Zoom in attracting new consumers but also in retaining existing customers experiencing budget restraints during the recession.
Rethinking pricing tactics may be valuable for firms looking to endure and thrive during a downturn. Let's roll up our sleeves and dive into the first step - evaluating your current pricing strategy.
Give your Pricing Strategy a Makeover
Assessing your current pricing strategy is the first step in revisiting your pricing to thrive during a recession. According to McKinsey & Company, companies should assess their pricing model, pricing structure, and tactics to determine their effectiveness in the current economic climate.
To change your pricing strategy effectively and sustainably, it's essential to follow these stages:
- Analyze your cost structure to determine if your current pricing strategy is sustainable and profitable. To do this, you need to understand your cost structure, including fixed and variable costs and profit margins for each product or service. By evaluating your cost structure, you can determine whether your current pricing strategy is profitable and sustainable in the long term.
- Align your pricing with the value you deliver to customers, considering whether you offer a premium or low-cost alternative. It's crucial to align your pricing strategy with the value you provide to customers, whether it's a premium product with premium pricing or a low-cost alternative to competitors. You need to consider the level of service and the features you provide, and the value they offer your customers.
- Evaluate whether you're pricing competitively or not, and gather customer feedback to identify areas for improvement. You need to evaluate your prices and compare them to your competitors to determine whether you're pricing competitively. Additionally, gathering customer feedback is essential to identify areas where you can improve your pricing strategy.
- Assess the impact of your pricing strategy on client retention and loyalty in the long run. Your pricing strategy can significantly impact client retention and loyalty, so you need to consider the long-term impact of your pricing changes. You should consider the impact of pricing changes on the value perception of your customers and whether they will remain loyal to your business over time.
- Finally, adjust your pricing strategy to match the demands of diverse customer segments in the current economic context. Based on your cost analysis, aligning pricing with customer value, pricing competitiveness, and customer feedback, you should make necessary changes to your pricing strategy. You must offer price options that match the demands of diverse customer segments in the current economic climate, ensuring your pricing strategy is sustainable and profitable.
HubSpot was one of the SaaS companies that adjusted its pricing strategy during a recession. During COVID, it offered a 20% discount on its Marketing Hub and Sales Hub Starting packages for the next year. This pricing modification was meant to assist small firms that were worst hit during the recession.
By offering a discount on its Marketing Hub and Sales Hub Starter packages, HubSpot aimed to help small businesses continue their marketing and sales efforts during the pandemic. The reduction made HubSpot's services more affordable to firms on a tight budget while also giving their marketing and sales efforts a much-needed boost.
Apart from profitability, SaaS firms should examine the influence of their pricing strategy on client retention and loyalty.
"Pricing is the lever that governs your customers' expectations and your capacity to offer value over time," says Dan Martell, CEO of SaaS Academy.
SaaS firms should strive to provide price options that are profitable for the company and appealing to customers. Another thing to consider when analyzing your pricing plan is the influence on your consumer base. It's not just about price today; it's about pricing in the future. This implies that businesses should think about how their price affects client loyalty and retention in the long run.
Also Read: Price transparency and its role in customer trust and loyalty
During a recession, SaaS firms that provide subscription-based services may need to reevaluate their pricing strategy to ensure that their prices correspond with their customers' shifting demands and finances. A Forbes study says, "if the firm can demonstrate that it is actively attempting to make the product available to more people at a difficult period, it can assist in developing trust and loyalty among its consumers."
SaaS firms may survive and develop their businesses even during difficult economic times by offering price options that match the demands of diverse consumer segments. After assessing the effectiveness of your present pricing strategy, it is time to take action and evaluate your pricing to ensure it is in line with the current economic context.
The following section will go through the important stages for changing your pricing strategy to create growth and sustain your business during a recession.
Adapt your Pricing to Maximize Profitability
Did you know that firms that modify their pricing tactics during a recession are twice as likely to survive and thrive? In this part, we'll see how revising your pricing strategy may help you generate growth, improve revenue, and keep your company afloat during a downturn.
Consider new pricing models that are more sensitive to the present economic environment
Businesses must reassess their pricing models during a recession to react to the changing economic circumstances. In doing so, businesses can adapt to changing market conditions and offer more competitive pricing options for customers. SaaS organizations may pursue usage-based pricing structures, in which users only pay for the services they utilize. This can give customers more budgeting options while allowing businesses to preserve their income sources.
According to a McKinsey & Company analysis, flexible pricing models such as subscription-based, pay-per-use, and outcome-based pricing can help businesses adjust to economic volatility. These pricing models enable businesses to expand their pricing models in response to consumer demand while giving customers more value.
Examine the effect of price cuts on profitability and consumer demand
When revising pricing strategies during a recession, businesses should examine the impact of cutting prices on profitability and consumer demand. Lowering prices, according to a Deloitte analysis, "is commonly a knee-jerk reaction to diminishing demand," but it can also have a detrimental impact on profitability.
Lowering pricing, on the other hand, might enhance client demand and sales volumes. During the COVID-19 pandemic, for example, Zoom provided free services to K-12 schools afflicted by the epidemic. This pricing change enhanced consumer demand for Zoom's services and helped the firm become a market leader in video conferencing.
Finding a sweet spot between profitability and discounting should be established before lowering prices. This helps businesses stay afloat, enjoy a huge consumer base, and have steady bottom lines.
Investigate pricing techniques like bundling, discounting, and dynamic pricing
Businesses should explore alternate pricing techniques to preserve and develop their operations during a recession. Bundling services, for example, may give clients more value while increasing sales volumes. During a recession, dynamic pricing, which adjusts prices based on client demand, may also efficiently enhance income streams.
Also, organizations can explore psychological pricing. Examples of psychological pricing techniques include using odd numbers (such as $9.99 instead of $10), or decoy pricing (such as offering a high-priced option to make a mid-priced option seem more reasonable). According to an HBR study, consumers are more inclined to critically examine items and prices during a recession, making it more necessary for firms to focus on their pricing strategy.
By using psychological pricing, businesses can create the perception of value and affordability, which can be more attractive to customers during a recession. Take the example of HubSpot. It offers a free CRM with basic features, as well as paid plans with more advanced features. It uses decoy pricing by offering a Starter plan that is priced significantly lower than its Professional and Enterprise plans, making the mid-priced Professional plan seem more reasonable. Thus, it influences customers to choose it over the lower-priced Starter plan.
Psychological pricing is a strategy that uses specific price points to create customers' perception of value or affordability. This pricing strategy can be useful during a recession since customers are more inclined to scrutinize items and prices attentively.
However, businesses should use psychological pricing strategically in conjunction with other pricing strategies to avoid commoditization and maintain profitability.
Here are some more ideas that you could consider implementing: https://openviewpartners.com/blog/revisit-your-pricing/
Watch, Adapt, and Optimize Frequently
Pricing isn't once set and done. Businesses must track the impact on sales, income, and profitability. This can assist organizations in determining whether their pricing strategy is effective and whether any changes need to be made.
To monitor the impact of the revised pricing strategy, businesses should analyze sales data, revenue data, and customer feedback. This can assist organizations in determining if their pricing strategy is driving growth or needs to be tweaked.
Assume a SaaS provider has developed a new price plan. In such instances, they should monitor the number of people who sign up for the plan and how this affects revenue and profitability. The organization may need to adapt or implement a new pricing strategy if the current price strategy is not driving growth.
Businesses should not only track sales and income statistics, but also listen to client feedback. This can assist firms in determining how customers are reacting to the pricing adjustment and whether they are experiencing any pain spots.
Companies may enhance customer satisfaction and modify their pricing strategy by responding to client complaints and comments.
Businesses should be prepared to modify the pricing strategy after monitoring the impact of the changed pricing strategy. This might include adding new pricing plans, altering prices, or completely revising the pricing system. Businesses that are versatile and adaptive can survive and develop their operations even during difficult economic times.
To summarize, reviewing pricing during a recession requires constant monitoring and adjustment of the pricing strategy.
During a recession, businesses may continue and improve their operations while driving company growth by reviewing sales and revenue data, listening to consumer input, and making required modifications.
Announce Pricing Changes Effectively
Explaining changes to your customers when adjusting your pricing strategy during a recession is critical. This helps to minimize misunderstanding while also retaining consumer trust and loyalty. Communication of pricing adjustments can be the difference between success and failure.
When explaining your altered pricing approach, educating your clients on how the changes will benefit them is critical. For example, if you've developed a new price plan that better corresponds with consumer demands and budgets, you should explain how it gives them more value. You may boost client satisfaction and loyalty by outlining the advantages of the new pricing plan.
"Customers are more willing to accept price increases when they understand the value they receive" - Harvard Business Review
You can boost the chance of client acceptance and satisfaction by addressing any issues or objections consumers may have.
Communicating your changed pricing plan entails giving advance notice, explaining the reasoning behind the changes, highlighting the benefits, providing options, communicating clearly and transparently, and being responsive to customer feedback. During a recession, you may preserve consumer trust and loyalty, boost customer happiness, and promote business development by properly explaining your pricing plan.
Conclusion
Rethinking pricing methods during a recession is critical for firms to maintain and flourish. Businesses may adapt to changing client requirements while maintaining profitability by employing pricing methods that reflect the current economic context. Consider new pricing models, assess the impact of price reductions, investigate alternative pricing methods, and adopt value-based pricing.
Evaluating your pricing approach is crucial for businesses thriving during a recession. Usage-based pricing is one pricing model that can be especially effective for SaaS companies. Companies may offer a flexible and scalable pricing strategy that matches customer requirements and budget restrictions by charging clients based on their actual product or service consumption. This may boost client happiness and loyalty, as well as income for the company.
However, any pricing adjustments must be evaluated for their influence on profitability and consumer demand, and the changed pricing strategy must be communicated to customers clearly and openly. Businesses may survive and develop through a recession and beyond by monitoring and altering their pricing strategy as needed.
