Shreyas Subbaraya, APAC Marketing Director at Whole Earth Brands, shares some approaches to pricing up smartly in the FMCG category as prices continue to rise around us.
Prices are going up all around us. We can see it in food prices, groceries, durables, and even services. Increase in cost of raw materials, added costs due to pandemic response measures on the factory floor and through the supply chain, and the ongoing shortage in shipping containers are factors driving prices up.
For FMCG business leaders around the world, driving price increases while minimising impact to volume and profit will take centerstage over the coming months. If you are helming a brand with leadership share in the category, there is an onus to lead the price-up hoping that other brands will follow.
In this article, I’d like to share some approaches to pricing up smartly.
- List price increase: This is straightforward. You propose an increase in your list price to the retailer (this is the price at which the retailer acquires the item from you) and the recommended price to shoppers. The retailer reserves the right to determine the latter.
- Magic price points: It is important to maintain psychological consumer price points. If you are pricing up an item from $9.50, it is better to hit $9.90 rather than $10.20. Same with 159 pesos instead of 163 pesos and 39 yuan instead of 42 yuan. Review the pricing waterfall in traditional trade, where your item will change multiple hands (distributor to wholesaler to reseller, with each taking a margin cut) before it reaches consumers.
- Pricing strategy vs. competition: Stay true to the pricing strategy you’ve defined. For example, if you are Index 100 - 105 vs. competition, don’t cross that range. If the competitor follows your price up, you have headroom for future increases within the range.
- Promoted vs. non-promoted price: Let’s take the earlier example of an item priced at $9.50 which when promoted (21% discount) sells for $7.50. If you price it up to $9.90, ensure the promoted price hits $7.90 (20% discount). Eagle-eyed readers will notice that the promotion depth has decreased – more about that later!
- Don’t vacate the ‘entry’ price point: There is a distinct price point at which consumers enter the category. For example, a cup of vanilla ice cream at 10 rupees or a sachet of powder detergent at 5 pesos. Don’t make the mistake of vacating this; instead leverage shrinkflation and cost savings (to be discussed below) to enable a price up.
- Shrinkflation: The alternative to a list price increase is to reduce the content while retaining the same price. A 300ml bottle of shampoo can be reduced to 290ml to deliver a 3% price-up. Similarly, a 15ml single-use sachet of fabric conditioner could be reduced to 14ml. In the latter case, maintaining parity usage experience is critical. If consumers find that the 14ml sachet doesn’t deliver the expected benefit, there is risk of switching to competition. Retain the package dimensions so that the ‘sizing impression’ in consumers’ minds remains the same. Key considerations when sizing down are GS1 barcode guidelines compliance; the window for code changes (usually coincides with range reviews) in modern retail; and a plan to build back distribution for the new pack in traditional trade.
- Premiumisation: This approach involves launching products priced higher than category average, and with better gross margin than the current SKU line up. As the sales contribution of such premium launches grow, there will be less pressure to price up on less profitable items. Premiumisation works when consumers see the value in paying a premium e.g., higher % of active ingredient, organic variety etc. While some households have been hard hit by the pandemic, there are others with pent up disposable income ready to be spent on innovative products. Successful launches drive penetration growth, as evidenced by our organic sugar alternative Whole Earth that has grown penetration by 200% over the last year in Australia.
- Price pack architecture: When faced with an inflationary or recessionary environment, some shoppers choose to trade down to cheaper options. Brands can launch ‘basic’ versions such as Tide Simply Clean, that promises to be ‘tough on odors but easy on your wallet’. There will be a cannibalization of the full-on version, so ensuring gross margin parity between the SKUs will be important to prevent adverse profit impact.
- Promotion depth and frequency: When adjusting the list price in an earlier example, we noticed the opportunity to reduce promotion depth (the discount percentage) from 21% to 20%, to hit a magic price point on the promoted price. You could alternatively decide not to increase prices, and instead reduce the promotion frequency i.e., the number of times you run a discount on an item each year. This could impact item sell-rate and reduce the volume sold on deal, but the reduced trade spending will cover for increased costs, and thereby preserve profit.
Of course, there will be questions asked: retailers will want to see justification e.g., raw material, freight cost increases, which they can independently validate through their private label procurement team. Here are a few points to keep in mind when increasing list price:
In the same penny-pinching environment, there will be ‘smart’ shoppers who are looking for better deals, and here’s where a super value pack comes in handy. You could offer a 50% upsized pack at a 25% price premium to the smaller pack, and still deliver the same or better gross margin. That’s because it is cheaper to offer more products given some input costs (such as labor) remain fixed, while there is additional cost benefit from a scale up in raw material procurement. Bulk packs also work well in e-commerce because consumers don’t have to lug their purchases back home, and the higher AOV justifies any shipping discounts that brands generally offer.
While adjusting promotion mechanics, ensure that channel specific needs are preserved. For example, offering competitive discounts during e-commerce mega sale days such as 11.11 or payday promotions in drug-pharma channels. Based on historical promotion effectiveness studies, you could replace a discount with a gift-with-purchase, or in e-commerce offer free shipping across the country. This is a proven influencer for online shoppers when considering whether to add a product to cart.
Related considerations
- Unlock cost savings: Even in an inflationary environment, you need to seek cost saving opportunities to reduce the need for steep price ups. Weed out product and package costs that add little value to the consumer. It may be a subtle glossy finish on the pack or a free scoop for products that use a standard teaspoon for serving size. You could also reformulate to deliver the same product performance at lower cost. As an example, remove a secondary flavor or color coating that isn’t necessary. When done smartly, you can ride on a sustainability message such as changing from plastic to glass packaging. The most comprehensive cost savings programme I have seen is Unilever’s 5S Program, that started in the Home Care division, and has since been adopted throughout the organisation.
- Anticipate retailer demands: What goes up comes down too. I mean this for raw material and freight costs. Retailers who supported brands to price up during inflationary periods will be quick to demand increased investment from brands when costs go down eventually. This might come in the form of an Everyday Low Price (EDLP) offer on a core SKU or an ask to invest in retailer capabilities such as targeted sampling, shelf highlights, sponsored search that bring added profitability to the retailer. It is key for brands to anticipate and plan ahead especially during retailer range reviews.
Final thoughts
Increasing prices on your brands is never easy but necessary. Leaders who master the art of pricing will continue to delight consumers while delivering P&L commitments. Each approach we reviewed above has its opportunities and trade-offs. The goal should be to maximise the former and minimise the latter. And of course, don’t forget to keep cranking the cost savings machine!
Fair Use Credit: The line art icons used in the framework visualisation are from www.flaticon.com. Sincere thanks to the artists: good-ware, freepik, icongeek26, srip, and monkik.
