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Pricing in consolidating markets

Rashaqa Rahman

Rashaqa Rahman is a Principal Consultant at Ibbaka. See her Skill Profile on Ibbaka Talent.

Part 5 in a series of posts on pricing and inflation - preparing for 2023

Part 1 Pricing and Inflation: How to Respond

Part 2 SaaS Companies plan to raise prices in 2023, do they know how to do this?

Part 3 Inflation does not give you a Carte Blanche to raise prices

Part 4 Value Driver Priority and Pricing Under Growth and Interest Rate Scenarios

Part 5 Pricing in consolidating markets (this post)

Part 6 How will a recession change market dynamics and impact your pricing strategy

Recession lead to consolidation - pricing in four scenarios

Consolidation or merging of businesses is a common response to a recession. There is a lot of talk going around about a recession in 2023, or at least a serious economic slowdown. One result of this could be consolidation, at least in some sectors.

Some customers may go out of business in a recession. Others will end up combining with their competitors. The result is fewer companies in a sector. 

Consolidation can also be a result of category maturity. There are two phases in this. As a standard solution emerges the market selects a small number of solutions. The number of companies in a sector goes down but the winners grow quickly. A ‘tornado’ begins in Geoffrey Moore’s words. Later on, as the category moves into late maturity, there is often consolidation as company’s exit and merge.

Pricing in consolidating markets

When you sell into a consolidating market you need to change how you think about pricing. The changes will depend on the nature of the consolidation. Is the market consolidating and growing or consolidating and shrinking. The pricing response will be different.

 Some of the possible ways to respond are by changing

  • pricing metrics - the unit by which the buyer pays

  • price levels - increasing, reducing or maintaining prices 

  • packaging - what is included in the offer/tier design

  • go-to-market strategy - what growth model works in a consolidating market

  • discounting and incentives

At Ibbaka we analyze this in terms of the Number of Potential Customers and the Number of Pricing Units. ‘Pricing Unit’ is a generic term for what gets priced and counted. In other words, the unit that the pricing metric is applied to. For example, for an accounting software solution provider charging per user, the B2B customer is accounting practices and the pricing unit is the individual accountants using the software. 

Let’s look at 4 different scenarios on how to price within a consolidating market.

Scenario 1 The number of potential customers is shrinking and the number of pricing units is increasing

If you are selling into a ‘tornado’ market, you need to focus on selling to larger customers. And those customers are growing fast. Your pricing should be designed so that you grow as the declining number of large customers grow.

These customers have market power. They can and will put pressure on price, but they need you to grow. Pricing needs to connect economic value for the customer to growth in the number of pricing units. In other words, because the number of pricing units (the unit by which the buyer pays) is increasing, it is important to ensure that the value metric (the unit by which the buyer derives value)  is mapped to the pricing unit and can scale.

However the pricing metric should not become a barrier to adoption and the customer should not feel like they are getting penalized the more they use a solution. This can be a difficult design challenge but it can be solved. 

Product led growth can be more difficult when there are large customers with complex procurement processes. This becomes more common with consolidation. This scenario is better suited to a sales led growth model, enabling the seller to put the value created for the customer in the context of the price. In a consolidating market with a shrinking number of potential customers, a sales led growth model can drive more sustainable revenues as the customer relationship matures over time. 

Scenario 2  The number of potential customers is shrinking and the number of pricing units is decreasing

This is the scenario we should all fear. If it is a long term trend, and not just part of the economic cycle, plan to exit the market. The vendors who stay in these markets find themselves fighting for scraps.

In this scenario, typically the low cost vendor wins. The seller does not have a lot of options but to match market price (price wars are common) or exit the market if their offer is not differentiated or value added enough. It can be hard to sustain differentiated value in these markets.

Senario 3 The number of potential customers is growing and the number of pricing units is decreasing

The strategy in this scenario should be to attract a lot of smaller customers. A product led growth strategy can win in this context. The product led model focuses on a low-touch, product driven sales and adoption strategy without having to make large investments in sales, customer success and delivery teams. 

To be successful within this market, the seller must ensure that they are providing a value-added user experience across  the customer lifecycle. Package design has to be carefully mapped to how each user persona gets value.  Freemium or trial offers are a requirement for product led growth strategies..

Make sure that pricing does not pose a barrier to adoption, and the users can easily select the offer and price point that is best suited to them. If you can design in a viral component, where users recommend the software to other users so much the better.

Scenario 4 The number of potential customers is growing and the pricing unit is increasing

The ‘growth’ scenario. Even during a recession there will be some markets that see both the number of potential customers and the number of pricing units increasing.

In this scenario, the pricing metric and the go-to-market strategy should focus on driving up both the number of customers and demand for pricing units.

Depending on the seller’s business strategy, they can choose to position their pricing as premium (charging the maximum that their pricing power allows) or adopt a penetration pricing strategy (pricing as low as possible to increase category share). 

The seller’s strategic goal and understanding of the market segments where they create the most differentiated value will determine the pricing strategy and go-to-market motion. While the focus should be on growth, it is important to understand who the seller creates the most differentiated value for at an acceptable cost to serve.

Here is another way of seeing these four scenarios. We all want to be in the top right quadrant, where there is a lot of growth potential, but during a recession we can find ourselves in markets where the number of potential customers or the number of pricing units is shrinking. Be prepared with pricing strategies that will help win more customers (top left) or grow the number of pricing units (bottom right). If you find yourself in the bottom left, with both the number of potential customers and the number of pricing units in decline, ask if this is cyclical, and things will get better with time, or if the market is in a structural decline.

Consolidation scenarios and growth models

The most effective growth model is different in each scenario.

Scenario 1 (Bottom Right) - sales led growth strategies will dominate.

Scenario 2 (Bottom Left) - a low cost transactional sales strategy is called for.

Scenario 3 (Top Left) - product led growth strategies will dominate.

Scenario 4 (Top Right) - hybrid strategies combining product led growth and sales led growth will dominate.

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