Ethical Pricing in a Recession: How Pricing Software Helps
September 19th, 2022 (Updated 03/10/2023) | 10 min. read
The question is on everyone’s lips right now; is it a recession, or isn’t it?
One thing is for sure, regardless of whatever you would like to call it, due to rising costs, supply chain breakdown, labor force shortages and a future that seems unpredictable is now the new normal. Companies face risks in every direction they look. Rising production costs pose a risk to your margins. Suppliers are renegotiating terms threatening business cash flows. Increasing prices and out-of-stock items are pushing customer loyalty to its limits, posing top-line growth dangers. And what’s more, higher interest rates are making it more expensive to refinance debt if you need to go down that slippery slope.
But there is a silver lining, pricing software can help you cultivate ethical pricing in a recession, maintain trust with your valued clients and make sure they are still there with you once we emerge together in better times on the other side.
At Pricefx, for more than a decade now we have been empowering businesses just like yours to find their own unique pricing niches with the use of innovative pricing software technology through good economic times and bad. As such, Pricefx is perfectly placed to discuss all manner of pressure points from our customers including assisting them in managing through tough times of sudden and extreme change.
So, let’s polish our crystal ball and consider what kind of recession could be on the horizon and how it may affect how your organization lines up its row of pricing ducks, before we delve a little deeper into the top 3 ways pricing software can help you maintain ethical pricing during recessionary times.
Why the Type of Recession Determines Your Ethical Pricing
Many observers expect any oncoming recessionary decline to be a lot less impactful than the 2007-09 Great Financial Crisis and the back-to-back 1980s twin economic downturns, when inflation was last this high. Most experts agree that the economy is simply not as far out of whack as it was in those earlier periods. But take your crystal ball back as far as the 1970’s to see clues of what we may have in store.
The oncoming recession (if and when it arrives) will take place at a time when pricing managers and executive decision makers across the globe will still be attempting to manage a range of major turmoils that did not exist concurrently during those previous recessions – such as supply chain breakdowns, labor shortages, the maze-like pathway out of a global pandemic, a war in Europe, tension in the South China Sea, and the impending possibility that inflation will continue during a recession – the perfect recipe for the first stagflation event since the 1970’s.
Why is Stagflation Different for My Pricing?
So, with GDP declining and prices increasing (including your product costs), stagflation could be on our pricing doorstep.
Occurring when prices are affected by inflation alongside unemployment and other economic output factors, stagflation means people are earning less money while spending more of their hard-earned dollars on everything from housing and utilities to food, medicine, and consumer products.
But it is not only consumers, but your costs are also going up and your selling price needs to move up too.
Or does it?
With the rationale that your costs have increased, you need to pass on those increases to your clients.
However, according to the Wall Street Journal, we now we are in an environment where the prices for raw materials and commodities (such as corn, wheat, lumber, cotton, and more) are down significantly.
What’s more, shipping costs from Asia to west coast U.S. ports have fallen more than 60% since September 2021, according to Axios.
For many businesses, costs are decreasing; then they should be decreasing price, right?
But it does not always work that way. If only if it were that simple.
There are trade-offs to be made and pricing is an intricate business. Of course, there are quid pro quos to consider with your pricing and ultimately, you need to make profit, but it needs to be justified to your client base. That’s the trade off and that builds trust with your customers.
However, in this expected period of stagflation your production and delivery costs may still be increasing, and you have already made so many price increases your customers over the last 2 years (with COVID-19 and supply chain disruptions), your clients might not be ready to accept another one.
Can you pass on the cost increase, or should you pass on that cost increase?
That is where the ethics comes in, and a quality pricing software solution can help you decide.
The Top 3 Ways Pricing Software Can Assist in Ethical Pricing
If you accept the rationale that your periods of increasing costs of production and delivery have led to the price increases you are passing on to your customers, then if we do go into a period of decreasing costs, then the ethical thing to do should be to decrease your prices. Right?
That is the conundrum right now, just because your costs of production may have or are about to start their downward journey, it comes at an unprecedented moment in time, and no one knows which way things are going to turn out.
Your prices may need to stay high for a while until wild cost fluctuations subside and you have recouped some of your lost revenue from the last two years.
That does not necessarily mean you are being a jerk or being unethical.
That said, there are several illegal and unethical pricing practices such as anti-competitive pricing, price fixing, price discrimination, price disinformation and monopolistic pricing.
Generally speaking, you should not hinder competition either by colluding with your competitors, partners or limiting choices for your customers.
Long story short, if you are not being a jerk and not interfering with the market working, you are pricing ethically.
One thing we do know for sure is that pricing software can assist you in making the decisions of what you need to do and when, how, and ethically keeping your clients in the loop.
1. Agile Pricing is Ethical Pricing
staying light on their feet and recognizing the need to keep pivoting when circumstances demand.
Adapting quickly and remaining pricing nimble to mitigate risk is critical and leveraging your pricing software solution and the automation it provides can even plug margin erosion gaps you never knew you had.
As leading pricing consultants, Bain & Company, recently wrote in recently wrote in their article,”The New Recession Playbook;”
‘Artificial intelligence and machine learning saved UPS 10 million gallons of gas, reducing carbon emissions by 100,000 tons, and saving $300 million to $400 million. Fincantieri developed a robotics solution for production that could deliver more than €15 million in annual net savings’.
We have some recent agile pricing success stories of our own too.
A long-term Pricefx pricing software customer, a giant European tire manufacturer, used to take up to 2 months to perform its price list updates manually in Excel spreadsheets. The result was out-of-date invoices being sent to customers and frequently requested claw-backs threatened to break down the company’s customer relationships, not to mention margin erosion on outdated prices.
Putting the automated price list updates from the Pricefx Price Setting module to work, the tire manufacturer cut its price list update time from 2 months to 20 minutes!
The tire company is now equipped to maintain better and more ethical customer relationships using agile and automated price updates.
What’s more, their customers are also notified of transparent price increases ASAP and subsequently, the threat of margin erosion through shoddy price list management has been mostly eliminated.
2. Ethical & Transparent Pricing – Communication is Key
Like it or loathe it, at some point during a recessionary or deep inflationary cycle, you will raise your prices.
In short, there is nothing unethical about that.
However, you must let customers know beforehand. How it is communicated is crucial.
Do it tactlessly and you risk losing out customers to competitors. It may result in customer complaints publicized through social media. And at times, public outrage due to price hikes can push companies to roll back their price decision.
It is not an unethical game of, “how much can we get away with?”
Your automated pricing software solution will enable you to advise your customers well ahead of time and give you the insights you need to tell them how and why it is happening.
Particularly in a B2B business environment, it is best to present price hikes in an informative, authentic, and transparent communication.
Provide your customers with plenty of time to come to terms with the price increase.
They may need to reassess their budget and/or consider alternative options, so you keep them in the loop ASAP.
Another ethical practice is to encourage your customers to make one or more product orders before any price increases kick in.
And if prices are going to drop, communicate those price decreases ahead of time too.
Use the price visibility and innate flexibility of your pricing software tool to foster good customer relationships.
Can you imagine the annoyance of a customer placing an order for 100 000 widgets one week, only to discover the next week that prices are dropping by 20%?
3. Intelligent & Granular Pricing is Ethical Pricing
In a recession, using pricing software to identify the different segments of your business where cost changes are felt the most is critical.
For example, if your line of products is difficult to source, limited in supply or has few viable alternatives, passing on a cost increase to your customers in order protect your profit margin can be easier to manage for this segment.
For instance, if the cost of one of your components in the manufacturing process is only a small percentage of a larger, finished product, passing on a small and reasonably explained price increase is usually well understood by your customers.
Remember, even small price increase increments can add a bundle to your organization’s bottom line.
However, just as importantly for the future, the visibility of the pricing technology enables you to explain the cost increase thoroughly yet concisely to your customer.
It is important to leverage the customer and product segmentation that pricing software provides to determine who those customers are, how and what they buy, and how to best optimize your prices for them.
By acting ‘pricing ethically’ you may just have retained that customer for better times when the recession is over.
Getting Started with Ethical Pricing & Pricing Software
Now you know the top 3 methods of how pricing software can help you price ethically in recession while keeping both the purveyors of your company bottom line and your customers as happy as possible.
If you are looking to get ahead during a recession and not simply ride out the storm, then you will want a comprehensive pricing software solution like Pricefx. With the latest in pricing technology, you can react at speed and respond in real time, all while maintaining ethical pricing transparency and visibility for your clients.
If your business is ready to start exploring pricing software options that will fit your company’s needs, this article below can help you finalize your pricing software choice;
However, if you have already exhausted your search for the best pricing software for your organization and have decided on Pricefx, talk to one of our pricing experts today to get started;