Is it the right time for a price increase?

Posted by Reed Holden on Aug 31, 2020 8:49:05 AM
Reed Holden

We have received many requests from companies wondering if it is a good idea to increase prices to offset declining sales during the pandemic. While the answer is generally no, it is important to recognize how buyers are changing their behavior and how the pandemic is causing disruption. So I thought it was wise to spend a few minutes reviewing the importance of understanding your distinct customer groups to bring clarity during economic chaos.

Let me give you an example. A recent article in The Wall Street Journal talks about how airlines are struggling with pricing. To summarize, the airlines have found that their current revenue management models just aren’t working. This should not be a surprise. Why? Because many of their traditional customer segments have dramatically changed their behavior and significantly reduced travel or stopped flying altogether.

To make matters worse, the most profitable customer segment for airlines, business people, has experienced great change. By and large, COVID-19 has taught business leaders how virtual interactions can be better than face-to-face meetings because they dramatically reduce expenses and time spent on travel. This will create a fundamental shift in the market and cause serious problems for the airlines, largely because they haven’t invested in understanding buying behavior or indicators of change.

Instead, airlines focus on historical data that often represents a limited number of customer segments in any geographic market. Since historical data is going haywire because of the pandemic, all signs point to trouble for the airlines going forward. Lots of it! Dax Cross, CEO of Revenue Analytics, the rockstars of revenue management, points to airlines flying with “blinders on.” What’s the solution? Start by doing a much better job understanding customers’ fears, desires, and behaviors.

Traditional segmentation often falls short because it groups dissimilar customers. The solution is to focus analytics on smaller, more relevant, groups of customers. Even if you have a large number of groups, proper analytics and dashboards will summarize results in a way that small groups can be understood and, more importantly, tested to see how they respond to changes in pricing or the offering itself. The technical term for this is “stochastic analysis.” A better term is “cohort analysis.” This takes time, but understanding customers and indicators for change are critical in disruptive times like these.

One company doing well during COVID-19 is UPS. Their services have been a critical element to Amazon’s success for years. But now, Amazon has changed its behavior and has invested in the delivery business with its own fleet of branded delivery vehicles. With this plan, they only use UPS for overflow. UPS’s pricing response is the addition of hefty fees to handle packages during rush times. Brilliant! This is a great example because UPS recognizes their value even when Amazon has changed their behavior. Good for UPS.

Will Amazon complain to UPS? Of course. How about next season when Amazon starts beating UPS up on high prices? UPS should offer them a discount with a clause in their contract that says that Amazon packages can be bumped when other more profitable packages are available. No, Amazon won’t go for it, but with this Give-GetSM, UPS could change the conversation to focus on value instead of price. Game, point, and match to UPS.

Don’t you just love pricing in uncertain times? I do.

Topics: Pricing with Confidence, big data, value, pricing