COVID-19 has caused major shifts in demand curves, and these shifts call for updates to distributors’ pricing models.
Items that were previously viewed as “high velocity” may be sitting on shelves. Demand may be skyrocketing for other items. As various sectors of the economy are reopening, these market dynamics are evolving. Demand may be getting stronger in some product and customer segments. In some cases, this is happening gradually. In other cases, demand spikes are more drastic, due to pent-up demand dynamics. Distributors with strong price management practices are making appropriate adjustments to adjust their pricing strategies accordingly.
As part of these efforts, some are updating their price segmentation schemes to ensure they reflect these evolving conditions. As an example, this can be accomplished by overlaying a COVID-19 demand category attribute to complement traditional segmentation schemes, in those market segments where COVID-19 is having a significant impact.
For example, a score of 1-5 to can be assigned to each price segment, with a score of 1 reflecting skyrocketing demand, and 5 reflecting a temporary lack of demand (e.g., due to a temporary and continuing shutdown of certain sectors of the economy). Pricing strategies can then be formulated for each COVID-19 demand category, and help set prices more effectively.
In demand category 5, (where demand is temporarily gone), the distributor can avoid taking unnecessary price cuts, realizing that sales volume will be unlikely to respond to price drops. Stepping up controls to avoid unnecessary, potentially panic-driven (and likely, ineffective) discounting may also be an applicable strategy to purse in these segments.
Of course, different pricing strategies apply on the other end of the spectrum, in demand category 1 (where demand is skyrocketing). While we strongly discourage price gouging (where prices are set disproportionately higher than historically established price levels), some price hikes to keep selling prices reasonably aligned with (likely rising) market price levels may be well justified – especially if the distributor is incurring extra costs to serve these customers. Margin dollars from these sales are critical to allow distributors’ businesses to stay healthy, so they can continue to serve as reliable quality supplies to their customer base.
Alleviating a Temporary Condition
In the final category – i.e., in segments where demand is gradually coming back as certain sectors of the economy are reopening – pricing may need to be managed even more delicately. These customers may be in a bad shape financially. Hopefully, this is a temporary condition. Still, their financial woes may render them even more price sensitive than they were pre-COVID-19.
Accordingly, inflated prices (even if the account is smaller, the item is “lower velocity”, etc.) may hurt the distributor’s ability to earn this kind of business – even more so than before. Given these increased price sensitivities, price can be an even more important factor driving new business for distributors targeting prospects in reopening economic sectors.
In brief, distributors may find themselves at a disadvantage if they fail to adjust their pricing strategies to reflect drastically changed, fast-evolving demand conditions. While the current challenges were driven by COVID-19 (and not by past pricing errors), it does not necessarily follow that pre-COVID-19 pricing schemes will work effectively in the current, changed and evolving economic landscape. In fact, it may be quite a while before demand levels get back to strong, pre-COVID-19 levels. As these economic changes evolve, distributors need to be agile and responsive, including in the area of price management.
Lee Nyari is managing partner of The Innovative Pricing Group, a consultancy offering strategic price management solutions for distributors (pricinginnovation.com). He is a seasoned distribution pricing executive with decades of experience leading strategic distribution pricing initiatives. His deep distribution industry pricing background is coupled with engagement leadership roles at top-tier strategy consulting firms. Nyari is a Certified Pricing Professional, a Certified Public Accountant, and he holds a full-time MBA in Marketing Strategy from Kellogg School of Management.