Pandemic Price Response

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 European and American continents. Which to execute if any can be revealed through thoughtfulness and analysis.

Price Gouging

Price gouging is a morally challenging but common response to a crisis which dramatically increases demand on offerings in short supply. 

It is occurring in consumer goods:

• An Amazon.com, the average price of a 12 oz 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 which usually would have sold 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 priced at $248,841 which usually sold under $80,000.

Laws commonly prohibit price gouging after a weather-related natural disaster on specific items, but few laws were written regarding price gouging during a pandemic. Legislatures are taking and promising 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 for every winner there is a loser in every stock trade. 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 at 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 on offerings in strong supply.

It is occurring:

• 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 offers a $0.50 discount to first responders and health care workers.
• Restaurants, scooter companies, rental cars providers, and many others are making their offers heavily discounted if not 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 ineffective at 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 most dire 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 to drive profitable sales for most executives. 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 challenge 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 include not only our first responders and hospital workers. They also include grocery workers, truckers, and delivery personnel meeting our new logistics demand. More sectors could be considered as heroic as well. Promotions targeting these sectors 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 either being furloughed, laid off, or fired. On top of these sectors, we have hundreds of thousands of factory workers who suddenly have been unable to go to work. And we cannot forget our friendly hairdressers, barbers, and cosmeticians who are at a social distance as well as all hospitality workers. The list of sectors financially challenged is long. Price promotions offered to these sectors enable some producers to connect their brand with being local and community supportive.

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 loss demand from the pandemic but 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:

• The Urner Barry wholesale benchmark price for a dozen 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 US gas (auto fuel) prices have dropped $0.44 per gallon over the same-time-last-year to $2.15 as of March. Forecasters anticipate it 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? If their industry is impacted like those mentioned above, the examples 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 some are appropriate. To determine the right response for your company, the above analysis indicates the 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, take appropriate action swiftly if any action is appropriate at all. 

Learn more about Tim J. Smith, PhD and Wiglaf Pricing at wiglafpricing.com