Pricing strategies for consumer products

Originally published on supra.tools/key-articles

Consumer goods pricing is not easy. After all, prices are ultimately set by retailers. Often times, they have other interests. But setting the right focus and using modern methods opens up completely new possibilities for a change in cooperation towards more optimal prices for both, brands and retailers.

The best-selling textbook on price management (Simon/Fassnacht) completely missed the topic of consumer goods pricing until the second edition. It is no coincidence that the industry struggles with a number of peculiarities that particularly concerns the cooperation with retailers. 

– It is the retail that sets the prices, not the consumer goods industry: it is not directly useful to know the optimum price. It is necessary to convince the retailer of this. 

– The consumer goods industry may have a different optimal price point: depending on the price pressure and the retail margin that the retailer adds, the optimal price may be different. A lower price definition may often make more sense for the retailer than for the manufacturer. 

– The retailer competes with the other purchasing sites and chains and thus optimizes the overall offer, not just the individual product. This is another reason why retailers may act against the interests of the brand companies and 

– decides independently on price promotions and thus often increases price sensitivity. In the focus standing products as for example beer unfortunately so often under promotion-induced price sensitivity. Many consumers have learned to buy only at promotional prices.

Other special features influence the pricing of consumer goods companies: 

– Shopper marketing (shelf management and placement) influences the subjective degree of distribution and the willingness to pay. A shelf near the checkout is known to have the greatest distribution power. Placing a product in a high-priced shelf environment promotes price acceptance. 

– High number of new products each year and high number of packaging changes each year leads to a continuous need for pricing insights. 

– No immediate, naturally occurring contact with the customer: Other industries usually have a good qualitative stream of customer feedback through physical contact with customers. This is usually not the case for consumer goods manufacturers. Special efforts are needed to compensate for this. 

– High market dynamics, prices and competitors change quickly depending on the market: one’s own pricing must keep pace here without becoming erratic. 

These results of pricing power are possible - also for medium-sized businesses

In this article, we would like to show how it is possible to master the challenges described. We will also show examples of what a modern approach can achieve: 

1. shelf prices are set approximately to the optimal price for the manufacturer
2. promotions take place to an appropriate extent and with an appropriate frequency
3. despite a high number of pricing decisions and markets, there is an overview and optimal management of all products at all times
4. you are close to the market and the needs of the customers – at any time and in all markets
5. the costs for supporting tools are affordable even for medium-sized companies.

Example for the consumer goods industry: A beverage brand breaks new ground

A well-known soft drink brand in Austria wanted to introduce a new vegan drink. 

As part of the product management process, the brand had already defined the price relations and hierarchies in the product portfolio. The product was categorized as a special edition. This means that it will always have to be priced above the standard product. 

To determine the optimal price, an implicit intelligence method would be used. For this it is necessary to define the following information in advance: 

– Product name and packaging design 

– Product short description as the consumer and the final consumer will perceive it.

– Price range i.e. the expected price as well as the under and over price limit. The expected resulted from the price hierarchy. 

– Definition of the target group by demographics and screener questions. 

The results were surprising. The existing strong brand not only led to a high willingness to pay, but also has always favored a moderate dealer margin by comparison. The result showed an optimal price point 20% higher than expected. 

The challenge now was to enforce this unexpected price as the shelf price in negotiations with retailers. It helped to incorporate the evidence of the willingness-to-pay measurement in the retailer discussions. 

The launch was a success. The positive reaction of the customers helped the retailers to maintain the price level. 

The successful establishment of this unexpectedly high price suggested that other products in the range also had potential for optimization. Thus, the central existing products including different container sizes were also subjected to a test.

A heterogeneous picture emerged. Some products were overpriced and others underpriced. Again, the retailer’s optimal shelf price was close to the manufacturer’s optimal shelf price. This allowed the brand to incorporate its own market research findings into the price negotiations. A partial price adjustment upwards and downwards was achieved.  

Implementation according to the ENIMU concept

The example is an illustrative implementation of the ENIMU concept: 

1. – Establish: Define price relations and hierarchies in the product portfolio.
2. – New: Set new prices correctly.
3. – Implement: price negotiations with retailers intelligently
4. – Maintain prices continuously
5. – Manage upsell price promotion 

Successful pricing of consumer goods requires professionalization in all 5 steps. This is how it works in detail: 

Establish – define price relations and hierarchies in the product portfolio. 

The perceived value of a product depends to some extent on the pricing of related products. The prices you can control as a brand are those of your own product portfolio. 

These prices should inherently make sense. Documenting a value and pricing hierarchy is a common practice for consumer product companies. But too often, relationships are hardwired by fixed percentages, and these values are more the result of a qualitative process – rather than an evidence-based process. 

So instead of basing the hierarchy on gut feeling and rules of thumb, the overriding measure should be evidence regarding willingness to pay. 

In concrete terms, this means that first and foremost, price responses should be measured for each product and these results calibrated using the hierarchy, if necessary. If a new product is to be introduced and the pricing determined for it does not fit into the pricing system, then it should be considered whether the price willingness of the other products should not be evaluated again. 

All this is mostly omitted today, because the suitable Insights technology of the Implicit Intelligence? is still hardly known. It enables precise, cost-effective evaluation of price readiness. 

NEW – Setting new prices correctly 

The pricing of new products is of strategic importance for several reasons. 

When introducing new products, there is no established reference price in the negotiation with the retailer as well as from the customer’s point of view or the reference can be controlled by communication. During this time, the reference of the established product is the current price. The change of this requires a particularly stronger justification and negotiation tactics. 

Therefore, it is an absolute must to calculate the exact willingness to buy depending on the price. The optimal pricing results from the price point at which the surplus for your brand is maximized. A precise and cost-effective optimization is enabled by Implicit Intelligence? for Pricing solutions such as supra.tools 

Implement – Intelligently design price negotiations with retailers 

The moment of truth takes place in the price negotiation with retailers. Here, good preparation is worth its weight in gold. 

Step one is to determine the optimal final price. After determining the price-sales function somewhat with Implicit Intelligence? for Pricing, the profit-maximizing price is as follows: 

– Calculate the revenue in which the projected sales are multiplied by the price. 

– Subtract from the sales 1. the value added taxes (in the USA), 2. the cost of goods sold (COGS), 3. the retail margin 

– Topic Retail Margin: As a rule, retailers act according to established rules, which usually provide for the markup of a certain percentage. This expected percentage is approximately known from the past for each retailer. 

Now and then other qualitative considerations and beliefs of the traders intervene, which then have to be cleared up in the conversation. 

Again, researched evidence is most useful for this conversations.  The optimal final price can be found by assuming the Retailers margin, the available data can be used to determine the final price that is optimal for the retailers profit. 

This is often similar to the company’s own optimal price. If brands now share their own insights with the retailer, this is a heavyweight argument in the negotiation situation.

In some cases, however, the optimal prices for consumer goods manufacturers and retailers diverge strongly. If the margin of the retailer is by far greater than that of the consumer goods manufacturer, the result is an imbalance that cannot be compensated for by sharing insights. 

So for the case, where the retailer tends to go far below the recommended retail price AND AT THE SAME TIME, this is also according to evidence the most profitable point for the handlerretailer…. 

…for this case an optimization on the second level should take place: by a higher selling price, the calculation of the handler retailer can be influenced and a higher final price can be reached. The exact optimum results are available from the insights and a simple simulation calculation. Tools for this are available on the market (e.g. supra.tools). 

Maintain – continuously maintain prices 

Consumer goods companies are reluctant to address the issue of changing the sales price. Retailers also perceive such discussions as pure cost-increase talks. This is because, for them, market prices are set and established and only change as a result of external influences, such as the introduction of a new product innovation or an inflation-driven wave of price increases. 

However, if both sides have evidence of how demand reacts to pricing, discussions can be constructive and productive. 

Practice shows that it is worthwhile to regularly put existing prices to the test. Most prices are not set optimally right from the start. If competing products are added over the years, or if brand or product preferences change, the willingness to pay also changes step by step. 

It is logical that a re-evaluation of the prices is advisable – approximately every year. This becomes even clearer when the enormous profit lever of the price is taken into account. The investment in this evidence is amortized after a few days. 

Upsell – managing price promotion 

Price promotions are the classic way in a go-to-market strategy of retailers to attract customers and maintain the price image. In the consumer products industry, companies are usually asked to participate in the promotion by offering a reduced sales price. 

The retailer’s argument is initially conclusive: A price promotion also convinces customers who would otherwise not buy. This increases the number of first-time buyers and thus significantly increases the chance that the number of repeat buyers will also rise. The brand also receives additional communication contacts, with “mental availability” and thus brand strength also increases. 

The effects of these benefits of this type of pricing strategy can be measured well. Unfortunately, there are also disadvantages. These disadvantages are difficult to measure. Price promotions lead to early purchases at a lower price. New customers who enter at a bargain often do not have the willingness to buy at regular pricing. 

Smart management of price promotions tries to balance both. To do this, it is necessary to quantify two effects: 

– What proportion of additional buyers would have purchased the product at a later date? This can be determined by price-marketing mix modeling 

– Which discount level can be expected to have which sales effects? 

The latter is often determined from past data. However, these usually only provide very specific discount levels “50% off” and types “Buy-One-Get-On-Free”. 

Here, too, the use of price-readiness measurement methods such as Implicit Intelligence makes sense. Often 40% or 33% off results in almost the same effect as 50% off. You would never find this out if you either tried it once or just measured it.

Especially with new products there is no empirical knowledge about the reaction to discounts. Here, there is no way around the mentioned methodologies for willingness to pay measurement. It is worthwhile to use them. Because without a quantitative assessment, you are flying blind. 

In summary: Pricing strategy for consumer goods

The pricing of consumer goods has a special complexity. Retailers set prices, not manufacturers. Retailers may have a different optimal price point. In addition, the retailer competes with other shoppers and therefore has a different calculation. Shopper marketing also influences the willingness to pay. Retailers also decide independently on price promotions. The high number of new products increases the complexity and a high market dynamic makes a constant optimization necessary. 

Nevertheless, with the right methods, it is possible to set shelf prices approximately at the optimal price for the manufacturer, to have promotions take place to an appropriate extent and frequency, to maintain an overview at all times, and to do so at affordable costs – even for medium-sized businesses. 

Levers for this are 

– The management of price relations and hierarchies in the product portfolio 

– Setting new prices correctly 

– Intelligent price negotiations with retailers 

– Continuously maintaining and renegotiating prices 

– Managing price promotion intelligently 

The key success factor is to generate the right insights regarding willingness to pay. In recent years, considerable success has been achieved in this area with the help of implicit intelligence methods for pricing. Supra.tools is the founder of this method class.