The Price Is Right

Of the 5 Ps of marketing (product, promotion, place, positioning, and price), price may be one of the most challenging to get right.

First, most markets are dynamic with relatively low switching costs, so consumers often experiment with several brands in each product category until they find a brand that consistently delivers against all of their needs. Secondly, as we all know, costs have been trending up, particularly over the past 18 – 24 months on ingredients, packaging, labor, healthcare costs, insurance, taxes, fuel, shipping, etc.

Those rising input costs put downward pressure on profit margins—not good. But can you simply increase your prices to maintain relative profitability? That depends. How strong is your brand value? Where is your pricing compared to your top competitors? When was the last time you took a pricing action and what happened then? Few brands are in the enviable position of being price inelastic, where your consumers will continue to buy no matter how high the price gets.

Pricing Strategies

Your pricing strategy should support your overall brand marketing strategy. And your brand strategy must fit with your goals and business plan. Here are the options.

  1. Premium pricing for a differentiated brand. If your brand delivers a superior product experience or has unique features, this is your lane. Ideally, this strategy provides you with a superior profit margin, but if your cost of goods is also higher, then you may just be higher priced. Luxury brands, or those with image and prestige play here.
  2. Cost-plus pricing where your price is based on achieving a target profit margin above your cost of goods. Many consumer-packaged goods companies follow this model, with the strongest brands commanding the best margins. Ideally most brands take pricing actions annually to get to their target profit margin (even though cost of goods moves around during the course of a year).
  3. Penetration pricing for those brands that are new and are looking to rapidly gain market share and initial trial. This strategy works best if your brand has a cost advantage compared with competitors, and if you can gradually increase your price over time to match your brand value. Typically, it is unsustainable to live at low introductory prices forever.
  4. High low, or promotional pricing for seasonal brands or those where the economics of big volume gains during discounted price periods can make sense over the course of a year. Of course, if you only sell product at a discounted price, your brand franchise is weak.
  5. Bundling is a pricing strategy where two or more complementary products are sold together for a price that’s lower than what the products would have cost individually. The discounted price motivates consumers to buy the bundle because it’s a better deal than buying them separately. This works for those brands where cross-sell and upsell is a priority to grow the business; however, few consumer-packaged goods brands can achieve this except during peak volume consumption periods.

Pricing Actions

Here is where you really need to do your homework, as many consumers are at the point where they may stop buying your brand and look for alternatives if they believe that your price is too high. For some commodities (like beef or eggs), consumers understand about supply disruptions due to bad crop harvests or adverse weather conditions. But in most cases, you are not free to increase prices with no risk of negative volume consequences.

If you can couple a pricing action with some positive product news (like improved flavor or ingredients, a sustainability benefit, or more convenient packaging), then you will be in better shape. Your trade customers will want to understand your price increase justification also, as they have profit margin goals as well. If possible, try to keep the percentage increase in the range of overall consumer price index (CPI) change. You can soften the blow to consumer budgets with some promotional price discounts. For those brands with a long period between purchases, some consumers may not recall what they paid the last time they bought. And if your brand is a “necessity,” there may be a bit more flexibility in the size of your pricing action.

The other option (which we are seeing a lot) is taking cost out of the product and keeping the price the same. Examples include smaller package sizes (e.g. fewer ounces) or taking out a feature (like reclosable packaging), fewer sheets on the roll or narrower sheets, or less of the “good stuff’ (like chocolate chips or raisins, etc.). Regular brand buyers will notice these “pricing” (cost saving) actions. And some may look for substitutes.

Larger, more sophisticated companies often do price optimization research with consumers to see which combination of actions is the most acceptable. Being too aggressive with pricing can be damaging to your brand. Proceed with caution, particularly if you depend on a core group of heavy brand users that represent significant lifetime value.

Bottomline

Yes, pricing at the end of the day is all about the bottomline. Your CFO will have strong opinions about the course of action, as few are happy with margin compression that leads to lower profits. That is a hard story for your investors or shareholders.

If your brand is in a strong position with sales momentum, and product enhancements that are driving share gains, congratulations. You have more pricing power.

For the rest of us, pricing is a tricky business. It is all about the numbers, but it is not always easy to get the right price.

At Forge, we thrive on helping clients get to the next level. We have worked with many clients at a crossroads where decisions are made with risks and implications. We stand ready to guide and debate the best path forward.

We are here to be your partner, a member of your extended team, an objective yet vested voice. And we will always bring the conversation back to strategy. Who is your primary target audience going forward? How does your product meet and exceed their needs? What are the best ways to enhance your product portfolio? How do we maximize the market opportunity and optimize return on investment?

Importantly, we are pragmatic, focused, and energetic. We get assignments done well, and quickly.

Take the first step to a more successful business today.

1.    Hit “LET’S TALK” to schedule a free 30-minute discussion. No pressure – we promise.
2.    We’ll provide real-world case studies showing the process in action.
3.    If we’re a fit, we finalize details and get started!

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