How to strike a balance between price and volume management

Price competition and the struggle for market share are getting tougher. How can companies most effectively manage their prices and volumes?

Consultants’ corner

Andrea Maessen & Fabian Braun/Simon-Kucher & Partners

THE INDUSTRY faces unprecedented challenges and with them a number of questions arise in relation to price management: Should volume be defended with price cuts or should margins be secured and a loss of customers accepted?

When and where should prices be adapted in order to secure selected accounts? What is the right preparation and response to price aggressive competition? Which price adaptations are necessary and how should they be implemented?

A recent survey by global consultancy Simon-Kucher & Partners among 83 senior managers in the chemical and construction industries reveals lessons and advice on actions.

According to the survey results, securing margins is the cornerstone of management activities during the downturn – 63% of the senior managers considered protecting margins as more important than defending market share and 43% stated that maintaining prices is even more important than reducing costs.

Of course, costs must be adjusted, especially in a downturn, but this crisis is too serious to react to by cutting costs only. All three profit drivers (price, volume and cost) must be used to the fullest extent.

For pricing, this means strictly defending prices and fighting against any price decrease. Keeping gross list prices stable, reinforcing value selling and boosting services are means to defend prices.

Price defense can also mean effectively and proactively managing decreasing prices. Achieving a smaller price decrease than the competition is a success in a downturn. An under-proportionate decrease of prices, when raw material costs drop, is a success in a downturn.

In order to defend prices, it is important to relieve volume pressure from the market. Still, 39% of the managers interviewed consider protecting volume to be more important than protecting market share.

Volume management becomes vital in a downturn. If a company pushes too much volume into the market, prices and margins will inevitably erode. It is a common misconception that lower prices will prevent volume losses in a downturn.

The result is different. Competitors will follow, prices drop across the board, margins decrease but the overall market share does not change. A downturn means that less volume is sold for the same price.

To effectively manage volume targets and protect market share, a fundamental understanding of the “deserved” market share is required.

By “deserved,” we mean a share that is based on a company’s capabilities to serve a market, for example, via its capacities and relative distances to markets or customers, through market access via their own sales organization or investments in sales channels or through innovations.

The adjustment of volumes and price defense mechanisms only works if the market understands. Communication is essential.

There are four basic rules to relieve volume pressure in the market: (1) clearly communicate supply reduction and stick to it; (2) state that market share is being defended; (3) make every effort to avoid price aggression; (4) prepare selected counter-actions to show ability of defense. Three out of four interviewed managers see this primarily as the responsibility of the market leaders.

RAISE PRICES; OFFER ALTERNATIVES
The relative importance of quality against price tilts in favor of price during a downturn. A range of measures exists to defend and stabilize prices in this situation.

About 36% of the managers are considering downgrading their products. They intend to provide a “good-enough” solution that meets their customers’ current needs, including remaining affordable.

The customer has the option to choose. A client for example recently changed the composition of a major product. It was less flexible and resulted in more effort during the customer’s formulation but was less costly in production. This product was offered at a 4% lower price to customers.

Some 25% of respondents consider the option of debundling products and services to provide a less expensive no-frills offer. The nice-to-have extras are the first to go.

The introduction of separate billing for services in individual cases helps to differentiate further. Not all services are in fact demanded by all customers. Those who demand and value the specific service should pay for it.

More than 60% of the managers rate the enhancement of performance as an important measure to stabilize prices and to justify higher prices.

One option is to focus on value propositions that directly impact the customer’s business. Some companies do a good job of pointing out how their product reduces total cost of ownership for customers, but most fail to quantify how their product impacts the revenue side of their customers.

Another option is to increase prices for niche and side products that draw less attention from the purchasing department, do not leverage costs at the customer, or show advantages over competitors.

TREAT CUSTOMERS DIFFERENTLY
Around 74% of the managers in the survey consider it more important to focus on key accounts in a downturn than to treat all customers equally.

Penetrating the existing customer base becomes more important than gaining new accounts. Roughly half of the managers concentrate on their existing customer base.

Although price defense is essential, price concessions may be unavoidable for some key accounts. Concessions, if necessary, must be as opaque as possible and of very selective nature.

Hidden discounts, preferably in the form of free deliveries, help to reduce visibility into pricing tactics.

Price concessions may be granted to strategic key accounts only, but should by any means be avoided for small customers. A strict limitation of exceptions and a close exception management is critical to avoid price contamination and price erosion.

PRICE LEADERSHIP AND CONTROL
Three out of four senior managers see a need for stronger central steering and control in pricing. Key performance indicators for pricing must be in place and tracked as regularly as margins and other financial metrics.

Close to 40% of senior managers consider installing a price officer function during the downturn. The price officer is responsible for tracking price guideline compliance, detecting price deviations and providing a centralized price database and reporting system.

Leadership is also required to provide price confidence to the sales force. Too frequently there is a misconception of the balance of power at the customer and an underestimation of the delivered differentiated value to the customer. As a consequence, the sales force is weakening its ability to defend prices.

Tighter price guidelines in combination with sales training, Q&A sessions and documents help to strengthen the front line in pricing. Successful price defense requires dedicated leadership and, in addition to that, the confidence in the sales force to make it happen.

Successful pricing in turbulent times still relies on proven price management instruments, but requires a more dedicated and differentiated application. Faulty decision-making inevitably leads to a collapse of prices. Achieved price levels over the years can easily be gone. Price defense is key.

Andrea Maessen is a partner with consultancy Simon-Kucher & Partners, where she leads the chemical division. She has more than 10 years of experience in helping firms to optimize pricing strategies and processes.

Fabian Braun is a partner at Simon-Kucher & Partners. He specializes in developing price strategies and new price systems for products, brands and services in the basic material and specialty chemistry sector.

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