Case Study: Pricing the Business

Too many companies price erratically and without developing a long-term plan. That's unfortunate because pricing the business is a critical lever in a marketer's arsenal to generate both top line and bottom line growth. So what is the best way to proceed along the path to pricing excellence?

It's certainly not by following the familiar route: Pricing decisions are often made by the marketing team and the general manager with critical input from finance, sales, and research. The decision is usually not unanimous because each constituent provides a different perspective. At times, emotions tend to play too large a role in driving the final decision. This allows fear to creep in: There is no way I can make my number now! There will be retailer retaliation! Private label is going to eat my lunch! The competition will never follow! You get the idea.

These stressful moments can go on and on unless – at the heart of the matter – the decision process is governed by a fact-based approach. Pricing should be systematic and strategic with a vision of the next price increase already in mind.

Let's look at the example of an HRCP client who shall remain anonymous (these are pricing decisions, after all). This company had not taken a pricing action in almost a decade and needed a strategic pricing recommendation. The objective of the initiative was two-fold: one, maximize volume and revenue without compromising the bottom line, and two, create consistency across the portfolio that was rife with too many different price points across brands and pack sizes. Most of the players involved in the last pricing action were gone. Also, new products, pack sizes and forms had been introduced with inconsistent pricing versus the rest of the line.

Our approach was simple and straight-forward: Understand how the consumer approached the market and the tradeoffs they were willing to make when it came to price. We identified how much volume would shift to other pack sizes or forms of the subject brand versus how much would shift to competitors as the price increased. This provides the critical "net" impact to the business that unit elasticity did not account for.

To provide an SKU-by-SKU price increase recommendation and the resulting financial impact for the client and retailers, we did the following:

• Incorporated brand roles
• Reflected the relative consumer price/value of items in the line
• Accounted for upcoming innovation pricing
• Worked through channel differences
• Identified spend-back opportunities.

What was the end game? Not only to create a pricing strategy across the line, but to create one that the client could execute with great confidence and sell into the retailer behind a complete story centered on consumer-based rationale.

We understood the strategic challenges of the business and marketplace behavior with regard to price changes. Our recommendation resulted in the creation of pack-size tiered pricing for base, premium and super-premium offerings that consistently reflected the appropriate price/value based on benefits offered to the consumer. To deliver against this tiered pricing strategy, we recommended price increases for each SKU ranging from 4% to 8.5%. Additionally, we identified which brands to spend back against and how much to spend by tactic.

The new tiered structure helped to develop a trade promotion strategy that leveraged the bundling of appropriate brands, resulting in improved promotional effectiveness and efficiencies. The recommendation also identified gaps in the line, the need for adjusting the counts of certain pack sizes, and better aligned Club product pricing to reflect the discount value that this special channel demands. Also, the recommended pricing scenario included the impact of the competition pricing or not pricing.

What about customer execution? Armed with the facts and a consumer-based story, the sales force sold in the price increase to the trade with no retaliation and instead left retailers with a feeling of strengthened partnership. Finally, the plan provided a path forward for pricing the business roughly every 18-24 months to take advantage of a very critical marketing lever and ensure that money would not be left on the table.

The net result has been validated. It is in line with the recommendation that identified the opportunity to grow the top line by more than $30 million with a positive impact to the bottom line, while spending back over $10 million to protect the volume of key brands.

That's pricing excellence.