Wharton@Work

March 2021 | Marketing

Pricing in a Pandemic: A Risky Move with Big Potential

If you could make just one change to drive greater profit for your business this year, what would it be? Bring an innovative new product or service to market? Advertise more? Reduce inefficiencies? Improve productivity? While these moves can certainly boost profits, they’re also complex, slow, and costly. Pricing, on the other hand, can be changed quickly and easily — and if you know what you’re doing, it can result in dramatic improvements. Yet pricing remains one of the least understood ways to grow a more profitable business.

“Most executives don’t really spend much time on it,” says Wharton marketing professor Z. John Zhang. “They just look at what everyone else is doing. That’s an honest status of many corporations today: they set prices based on costs or precedents in their organization and industry, and make occasional adjustments. In ordinary times, that is not really a problem. As long as sales and profits are going well, you don’t need to worry.”

Pricing in a Pandemic

Zhang, who is co-academic director of Pricing Strategies: Measuring, Capturing, and Retaining Value, says COVID-19 changed that. “The pandemic forced pricing to the forefront. For companies in customer-contact heavy industries where demand practically disappeared, the question became ‘Should we lower prices, and if so, how low should we go?’ For other companies at the other extreme, as ecommerce orders and demand for cleaning and food products skyrocketed, the question became whether to raise prices.” When the potential outcomes include driving away customers and creating shortages, having deep knowledge of how pricing works, and how changes in either direction may affect your business and your bottom line in the long term, became critical.

Zhang says the companies that know something about pricing and have a disciplined approach (rather than a knee-jerk reaction), do better both in the short and long term. “They are able to think about the situation and apply proven principles, tactics, and strategies. Knowing how to price properly can create an advantage over those who have always relied on ‘the way things have always been done,’ whether in your company or industry or both.”

The Danger Zone

Lack of knowledge isn’t the only reason executives stay away from pricing, even when they understand its potential for driving significant increases in profit. Zhang says many executives are reluctant to get involved because it’s dangerous. “If you set a price too high, demand drops. Too low, you won’t make money even if sales are high. The effects are dramatic and come quickly, and can be traced directly to the person who made the decision. In other words, even with the promise of great potential rewards, it’s safer to stay away from pricing unless you have the confidence or the right stuff, so to speak.”

Zhang wants to change that. He and Executive Education Vice Dean Jagmohan Raju — authors of Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability — provide the knowledge and confidence needed to mitigate the risk and take action. “People who think it is risky don’t know a lot about it,” says Zhang. “There is a right and a wrong way to set prices. In the program you will learn how to capture the value you have created in the marketplace to sustain growth and the future of your company. Today, that is more important that ever.”

Same Principles — New Circumstances, New Insights

“We will show you how to structure prices across products, markets, and customers. Those principles are always there — the science behind pricing hasn’t changed,” Zhang says. “What has changed is the current situation, where you can’t rely on historical data to make decisions. But the principles can have an even greater impact, and are more timely, when you are facing strange circumstances due to the pandemic. You cannot follow science if you do not know it in the first place. Pricing Strategies helps you to learn the science and analyze the pricing environment in an intelligent way.”

It also helps you better understand your customers. In a session on the psychological aspects of pricing, Zhang shows how to tap into what motivates people to make a purchase. “When you understand that motivation, you can influence them in a way that makes them feel happy to pay your price, even if you have raised it. There is a right and wrong way to raise it,” Zhang says. “Psychology also helps you know how people process pricing decreases so that you do not have to deal with longer-term adverse consequences due to your price cuts today. Whether you sweat over price decreases or increases, we will show you how to get them right and to influence the buying decision in your favor.”

Zhang says whether demand goes up or down (either dramatically, as with the pandemic, or more naturally over the life cycle of a product or service), your objective remains the same: to design a pricing structure that goes after sales volume while making sure you have a good margin. “We can show you in the program how to simultaneously achieve both,” Zhang says. “The knowledge and confidence you gain will help you put a pricing regimen in place that you can follow now and after the pandemic.”