The COVID-19 crisis and the Corona crash are shaking the context for consumer decision behavior. As a result, the context for net revenue management (NRM) has also been disturbed for consumer goods companies.
Companies must adapt revenue strategies to the new situation, at the same time as consumers are adapting to “the new normal.” To be successful, you need to anticipate and influence consumer decisions in a changing environment. This holds true in times of normalcy, but especially during the recession to come.
Although the COVID-19 crisis is not yet over, learnings from previous crises and knowledge of consumer behavioral frameworks mean we can map out consequences for net revenue management strategies.
So, what should you consider in planning your next moves?
Read on to better understand the impact of the crisis on pricing and revenue management strategies. Get tips on how to successfully adapt long-term plans following the COVID-19 crisis.
Understand the key factors informing revenue strategies
Consider revenue as the sum of all consumers’ buying decisions. Revenue is generated by consumers, who follow various decision processes and who react differently to companies’ product offers depending on the context or situation they are in.
So, consumer decision behavior is where you need to focus as you define your pricing and revenue management strategy.
You are likely familiar with the four main business levers (brand, product, price, and promotion) that make up your product offer, and that drive your company’s revenue. However, the sensitivity to these levers (and the consumer’s “willingness to pay” for your product) is heavily dependent on the context of the purchase decision.
At SKIM, our NRM framework considers the main business levers in the context of four intertwined dimensions including: channel, competitors, consumers, and conditions (e.g. trade terms).
For example, we can expect that the sensitivity to price, brand or pack size will change in a recession, when certain consumers have less money to spend and consumers mindsets change.
Note that net revenue management focuses on revenue minus all costs and rebates needed to realize revenue. Costs to consider can be marketing and sales related, but also related to other business functions like production, packaging, logistics. All these costs will also be impacted greatly by context. So, an effective NRM strategy would always aim to find the spaces where there is high revenue potential at relatively lower costs to realize.
The changing context of NRM post-COVID
Before you consider dropping your prices or offering aggressive promotions to boost sales or total revenues post-COVID, it’s important to explore three factors changing the situation for pricing and revenue management strategies.
Changes in consumer behavior
COVID-19 has triggered unprecedented changes in consumer behavior. From digital behavior, to new purchase decisions, people are making different decisions. Some will stick, others may not.
SKIM’s Habitual-Deliberate Decision Loop can help you understand how consumers’ disrupted habits are leading to them making more “deliberate” rather than “habitual” buying choices. For net revenue management, it’s vital that you prevent consumers switching to different brands (by reinforcing the habitual loop) and win new customers (guiding them through the deliberate loop).
In most countries, recession is inevitable, although the impact will differ by country, industry and consumer group. Your competitor’s priorities may shift in the post COVID-19 situation. Whether it is adjusting to macro-economics, shifting channels (e.g. online vs. brick and mortar) or potential competitive scenarios, you need to plan for these shifts, but avoid harming long-term brand positioning and pricing potential.
Changing consumer psychology
A crisis stimulates a change in beliefs, needs, and attitudes, both during and after the event. This means that consumer perception of the value of certain products and services may also change. For example, consumers may buy smaller pack sizes, or do without a particular product or brand entirely (e.g. opting for conventional vs. organic products). As you reassess your long-term strategies, ask: How and to what degree are consumers’ perceptions of your brand changing? What current logic are those consumers following and what are the value drivers?
6 tips for adapting your pricing and revenue management strategy following COVID-19
Consumers have experienced unprecedented disruptions and adjusting to the aftermath of the public health and economic crisis will not be easy. You too must adapt during this profound adjustment period.
Gaining a robust understanding of consumer decision behavior will help you make the right choices to thrive in this new context.
Based on our 40 years predicting consumer decision behavior, here are six tips to consider when planning your revenue management strategy following the 2020 Corona crash:
1. Dive deeper into consumer segments to uncover changing dynamics
It’s important to understand that NRM is often based on averages and totals, which don’t reflect the significant increases in consumer diversity. Not all consumers will be affected in the same way by the crash. For example, cutting prices to reflect reduced spending power is to be avoided, if that reduces revenue from shoppers who would have bought anyway.
It’s crucial to recognize the changing dynamics that affect your consumer segments, so you know if your intended strategy will be effective for specific target groups
2. Use your portfolio to manage revenue
It is important to recognize that in the recession there will be a significant decrease in market demand and spending power. Rather than only changing prices, you should adapt your offer to match the needs of consumers who are spending more prudently. One option is to create affordable, alternative SKUs or brands, but this must be done with attention to NRM, value, cost, and price constraints.
On the other hand, there are those who will be able to afford their usual brands/products. Here, your goal will be to strengthen their habits, and manage revenue by adding value to justify price or even command a higher premium based on their needs.
3. Evolve your pricing research approach for more agility
While much is changing, old standards may not apply. You need agile research methods to come up with more accurate answers. Targeted primary research will help you track changes in consumer perception about your brand, product, pricing, and promotions.
It is also worth considering that the insights you gained three months ago (or more) could well be out-of-date, so there is great value in repeating your research exercises to reflect the new context.
While a data-driven approach is key to successful pricing and revenue management strategies, a wide set of data sources is essential. Sales data, brand trackers, marketing mix models, expert views, and consumer insights on price elasticity (e.g. pricing research like conjoint analysis studies) can all give you a piece of the puzzle. However, to ensure the most accurate predictions, analytical rigor must be applied when combining different data sources.
The bottom line is that the pricing research techniques chosen can affect the results and can impact the overall success of your NRM strategy.
4. Accept that there are areas you won’t be able to get full visibility over
Rather than trying to get a complete understanding of your entire category and consumer groups, focus on having enough information and evolve your plans over time. First, get enough information – new or existing – to inform your strategies, then regularly reassess the assumptions you have had to make. Work out which data sources you need to fill in gaps – again, this could become clearer over time – to help you predict coming trends.
5. Focus on the future to reinforce positive habits and disrupt unfavorable ones
Consumer behavior and consumer psychology is changing. It’s important not to extrapolate too much from the past as this may not be reliable. Instead, carefully consider which parts of consumer behavior are changing and which ones will quickly go back to pre-COVID behavior. The focus should be on understanding “the new normal” will look like. Use the changing dynamics to strengthen your position for the future.
Lead in the new normal with products and services that are more relevant and that resonate differently in the new context. Your goal is to manage positive new habits (e.g. buying online), disrupts those that are not favorable (e.g. ditching private label brands) and encourages repeat buying in the new context (e.g. choosing healthier options).
6) Don’t damage long-term revenue potential with frequent price reductions
Net price is a key component of revenue generation. While rebates and price promotions can be used to boost sales, in an unstable market, promotions may be less effective. Use pricing strategies wisely: frequent reductions and buying market share can damage long-term value, price perception and revenue potential.
Price is a very important influencer for consumers, so, use it. But, even in a recession, it’s better to compete on value or the value price ratio. Use pricing consciously to influence the decision and realize net revenue goals!
Though you may need to buckle up for a bumpy ride, gaining and acting on robust insights will help you make better revenue decisions. As you adapt your NRM strategy, you will need to address changing priorities without damaging long-term brand loyalty and perception.
Visit our COVID-19 and Decision Behavior Disruption knowledge center for more content in this series.
We are sharing additional theories, best practices and tips on decision-making, eCommerce, innovation, and revenue management strategies. Our goal is to provide inspiration, answers to common questions we’re receiving and help you navigate the new normal.