Magic price points not so magical for the consumer
Vani Gupta Dandia
Marketing Consultant I Visiting faculty at Ashoka University I Sr Advisor KPMG. I Ex Mkt Dir PepsiCo I BT 40 under 40
SHOCKING! the word "inflation" in HUL's Dec Earnings call was mentioned how many times, do you know??41!!!?
Why is that significant? Because when companies like HUL have to move away from the ??'magic price points' then you know we have a problem.???
What is a magic price point??
1/-, 2/-, 5/-, 10/- are the most important magic price points.? India thrives and survives on everything sold in sachets / tikkis/ bars that come in 5/- and lower.??
Shampoo sachets for example are 65%+ contribution of the total category in both volume and value.??In snacks and biscuits the 10/- and under price points contribute to more than 70% of the total category.??
Nowadays everything comes in sachets, small packs, ultra small packs, even if single use :?Moisturizing cream, coffee, Vicks, sanitary napkins, horlics, oil, biscuits... you name it.? And all these sell on coinage/ round price point notes.??
That's 1/-, 2/-, 5/- and 10/-.??
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(We made a very desperate and forced attempt to sell Kurkure Butter Masti at 12/- instead of 10/-... despite heavy media spends and flogging the sales teams everyday, with the CEO tracking numbers and making calls himself, it died without a trace. ? A great product lost to wrong pricing because we arrogantly thought we could get consumers to change habits.? )?
"Almost 30% of our business comes from packs that sell at magic price points" says Ritesh Tiwari, CFO HUL.? (In Volume terms this number should be upwards of 50% is my guess)?
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Do you know what all (yes all!) snack, cakes, bread, biscuits, ice cream, chocolate (and many many other brands) do to manage inflation vs the consumer stickiness to magic price pts??
- reduce the number of chips in the bag?
- reduce the number of biscuits?
- make the biscuit/ the bar smaller?
- more air in the bag...
It's called the 'salaami effect' -- keep slicing off salaami proportions untill the consumer says, "what shit, I'm being cheated!"?
??♀???♂???
That's when the next brand manager comes along, commissions a huge research and proudly proclaims the need for a relaunch!! Let's serve the consumer better! and tries something new and within a few months, maybe max a year, it's subjected to the the same salaami cycle... until a new ????♂???♀?
Surf Excel bar is up from 10/- to 12/-.? They didn't decide to slice off some bit of the bar/ make it thinner.? They jacked up the price to 12/-.? That means inflation must be hurting them real bad.? And that's a bad bad signal for times to come.??
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Some interesting comments:
This is a necessary evil in terms maintaining gross margins I believe. RM inflation can have a high impact in categories especially in categories where COGS as a % is relatively high. In dairy category RM prices could even fluctuate intra year depending on whether it was a milk flush or lean season. Whenever possible we would pass on the benefit to the consumers however with other inflationary pressures setting in from RM/PM perspective this slicing had to be done from PnL health perspective. Also going back to concept of 'just noticeable difference' consumers are much likely to react negatively to a price fluctuation upwards as compared to a grammage decrease.
The new (terrible) buzzword is Shrinkflation.Packaging and product quality also take a hit. It's all been done before. But now perhaps this creates an opportunity for smaller players with lower overheads and clever digital marketing strategies.
One thing somehow never made sense.
What logic is attributed by brand Managers to why a shampoo bottle of say 200ml is expensive than 20 sachets of 10ml shampoo pouch?
Is easy of pouring taken as a convenience for which there is a premium? Same about food packs like Tea.
Insightful perspective! Thanks for sharing. Inflation is so real and so is the salaami effect. We, as retail consumers, don't realize the extent of the salaami wave until the bag of chips is nothing but air and hardly any real chips come out of it. I recall the case of Nestle - who has been doing it for many years. One of their best-selling products in the Indian market - Maggi - its packaging was lowered from 100g to a much-reduced 70g to maintain the 10/15 price point!!
Good to see such articles ! Yes It’s indeed really painful for any FMCG company to increase the price of their products ! Besides the increase of the material costs, which can be as high as 65 to 70% of selling price , FMCG companies are exposed to multiple transportation costs as well till secondary sales/ distribution . Factories / SC do their best to keep reducing the manufacturing costs ( thru wastage control , repair and maintenance costs and energy ) using programs like TPM ( but this part is small varying between 7 to 11% for ambient products ) . Still remember for how many years price of day Lux soap was maintained at Rs 10 a unit ! Concept of LUP ( low unit packs ) started long back ; we used to produce paisa packets in Lipton / Brookebond factories for tea in 80s ; it’s indeed difficult to control weight below certain grammage at the FFS machines as well ! So when the companies are unable to meet the needs of consumer from the delivered quality viewpoint from one sachet pack and also unable to comply with the Weights and Measures Act , they are forced to increase the sachet price most reluctantly as consumers do always remain their priority !
Parle Agro's newest launch is a milk shake selling in 85ml tetrapaks. 85 ml!! That's around half the size of a typical beverage tetrapack.. Price is perfect though.. 10 Rs :) for fruit beverages, I think the share of 10 and 15 Rs SKUs will be even higher at around 70% by volumes.
Very well said Vani Gupta Dandia
The warning magic of magic price points