For some, the COVID-19 pandemic presents business opportunities. For most, it creates a crisis. What should executives do with pricing during this time?
Observation reveals a variety of price response options. Price gouging, price promotions and discounts, and dramatic price increases and decreases have all occurred within the first months of COVID-19 reaching the European and American continents. Which tactic to execute, if any, can be revealed through thoughtfulness and analysis.
Price gouging is a morally challenging but common response to a crisis that dramatically increases demand on offerings in short supply.
It is occurring in consumer goods:
- On Amazon.com, the average price of a 12oz two-pack of Purell shifted from a normal price near $9.95 to an abnormal listing for $99.95.
- At Metro Drugs, a Manhattan pharmacy, 20 face masks were priced at $200 when they would usually have sold for near $40.
- In Chicago, four rolls of toilet paper were reported to be priced at $12.99, more than double the usual price.
And it is occurring in industrial transactions as well:
- Allegations of price gouging have been raised with pharmacy benefits managers.
- 3M has filled suit regarding price gouging on N95 masks in New York and New Jersey.
- New York saw portable X-ray machines, which usually sold for under $80,000, priced at $248,841.
Laws commonly prohibit price gouging on specific items after a weather-related natural disaster, but few laws have been written regarding price gouging during a pandemic. Legislatures are taking action, but that will largely impact the future, not the present.
Price gouging is a short-term, profit-grabbing decision. In effect, the price gouger is telling the customer “If you don’t buy it, I can sell it elsewhere, so I don’t care if you object. I can make money for myself at someone else’s expense.” Such a statement is not congruent with developing long-term relationships, but the people doing pricing gouging are not seeking relationship continuity.
In financial markets it is said that, in every stock trade, for every winner there is a loser. If the seller views their business like stock trading, they won’t mind “winning” at another’s expense.
Often, price gougers are relatively unheard-of members within a lengthy and broad distribution channel. They are individuals that become infamous only when their selfish acts come to light. We experienced this with pharma-bro Martin Shkreli, who gladly accepted vilification and social isolation in exchange for short-term profits.
Because manufacturers and platforms seek long-term relationship with their patrons, they generally try to prohibit price gouging. Policies and contracts are used to discourage price gouging. However, distributors and individuals are in arms-length relationships with manufacturers and platforms, and as such, the ability of manufacturers and platforms to drive compliance is limited and may not be timely.
Should executives price gouge? Not if they seek to continue business with their customers after the crisis is mitigated. Not if the law prohibits it. Not if they care what people think of them. But a small minority will do it.
Price Promotions and Discounts
Price promotions and discounts are profit challenging but common responses to a decrease in demand for offerings in strong supply.
They are occurring in multiple sectors:
- Edmunds reports car loans are being extended to 84 months – that’s 7 years – in response to lower new car purchasing demand (and with the benefit of currently low interest rates).
- Airlines, from British Airways to United Airlines, have plummeted prices for air travel.
- GrubHub deferred delivery fees for independent restaurants. DoorDash followed suit with a 50% reduction in commissions for local restaurants.
- BP is offering a $0.50 discount on fuel purchases to first responders and health care workers.
- Restaurants, scooter companies, rental cars providers, and many others are heavily discounting their offers (if not making them free) to a variety of sectors heavily impacted by this pandemic.
Promotions and short-term discounting are proven to be highly effective for short-term market share gains yet highly ineffective for generating overall category demand.
First, consider an industry where demand has sharply decreased, such as automobile purchases or air travel. In these industries, price is not the key issue depressing demand. Rather, new social distancing guidelines make shopping for cars at a dealership or sitting in airports and on airplanes inappropriate for all but the direst of situations. Moreover, cars and air travel are derived demand, not primary demand. The demand for these and many other offerings is derived from the demand to engage with others in person. Currently, the demand for engaging with others in person is very low, thus the demand for offerings that enable that engagement is also low.
Since categorical demand is low for these offerings, and since price promotions and discounts are ineffective at driving categorical demand, and since price promotions and discounts come at the cost of lower price capture, price promotions and discounts are not a recommended solution for most executives to drive profitable sales. Moreover, these facts recommend against continuing any current or soon-to-be price promotions and discounts in the market.
Second, consider an industry that benefits from being perceived as socially responsible. These industries have been targeting price promotions and discounts specifically at those sectors most impacted. The impacts they are considering include both new demands or importance on labor, increased risk in the working environment, or new financial challenges related to income decreases.
Those with new demands on their labor or increased health risks in their working environment are being positioned as heroes. These individuals do not only include our first responders and hospital workers. They also include grocery workers, truckers, and delivery personnel meeting our new logistics demands. More sectors could be considered as heroic as well. Promotions targeting these sectors can enable some producers to connect their brand with the positive, proactive concept of being a hero.
Those financially challenged by the pandemic represent a significant portion of society. 14 million Americans work in restaurants, most of which have suffered from lost or reduced income. Millions more workers in retail are being furloughed. On top of these sectors, we have hundreds of thousands of factory workers who have suddenly been unable to go to work. And we cannot forget our friendly hairdressers, barbers, cosmeticians and all hospitality workers who are at a social distance as well. The list of sectors facing financial challenges is long and growing. Offering price promotions to these sectors enables producers to align their brand with “being local” and supporting the local community.
In these second cases, the positive brand association associated with the price promotion is being used by some executives to generate goodwill and positive brand allegiance.
Should executives execute price promotions and discounts? These considerations indicate that they will not be useful in recovering lost demand resulting from the pandemic but that they can be useful for brand positioning and creating positive mental connections.
Dramatic Price Increases and Decreases
Large price swings, unrelated to price gouging, have occurred related to large shifts in demand.
It is occurring in multiple sectors:
- The Urner Barry wholesale benchmark price for a dozen of conventional California eggs rose from $1.55 on 2 March, 2020 to $3.66 by 27 March, 2020. Home cooking has increased the demand for eggs.
- Average U.S. gas (auto fuel) prices have dropped $0.44 per gallon over the same time last year to $2.15 as of March 2020. Forecasters anticipate prices will drop below $1.25 per gallon in May. A Russia-OPEC price war and reduced demand for fuel are depressing prices.
- Class III milk contracts have dropped from above $20 in December 2020 to below $13 in March 2020 as demand for cheese used heavily by restaurants has collapsed. Some dairies report dumping their milk. Meanwhile, many are reporting higher dairy prices at the grocer. A similar story is found with bacon and hog farmers.
These price swings, both upwards and downwards, reflect the dramatic shift in purchasing patterns across society. As society shelters-in-place and practices social distancing, past consumer channels of restaurants and retailers are being replaced with grocers and online shopping. This dramatic shift in purchasing channels strains lean production and logistics operations of modern industry and demonstrates the value of having slack in the channel. It will take time for production, packaging, and logistics to fully accommodate these shifts. In the meantime, the prices of commodities and end-products derived from them may wildly swing and not necessarily in the same direction.
Should executives execute a dramatic price change? They should if their industry is impacted like those mentioned in the examples above, which demonstrate their necessity.
Proper Pandemic Price Response
So, which is the proper price response to our current pandemic: price gouging, promotions and discounts, or accelerated price changes? Each occurs and can sometimes be appropriate. To determine the right response for your company, you need to think before acting.
The impetus for taking a price action varies. The outcomes are broadly predictable depending on the situation. Consider the expected outcome and the desirability of that outcome. Conduct the analysis. Then, if any action is appropriate, take it swiftly.