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It’s Time to Use Pricing As Strategic Tool for Growth
By Paul Thompson

According to a recent article in BusinessWeek, many major CPG companies are planning to raise prices due to higher energy and packaging costs. The increases varied from 2% to 5%. The magazine cited Clorox, Kimberly Clark, Kraft Foods, Pepsico, and Anheuser Busch. The article went onto highlight manufacturers that were unsuccessful in maintaining price increases due to market share declines or other reasons.

Many makers of consumer products view pricing action as a reactive last resort to fix escalating cost problems. It is an episodic occurrence. Unfortunately, many lack the “know how” and evaluating disciplines to make informed pricing decisions.

It’s time to use pricing as a strategic tool for revenue and profit growth. How?

Disciplines of Good Pricing Strategy

Most manufacturers tend to focus on gross margin or gross margin after trade spending at the expense of focusing on the top line through a good understanding of pricing management. Pricing management should be an extension of good brand role development which aligns spending and program objectives with pricing risks and opportunities. When reviewing the brand role, some questions that must be addressed are:

What is the personality of the brand?
Is it a premium or value brand?
Is it an expandable consumption category?
What role does everyday price play versus promoted prices?
Are there any critical price gaps to competitors that need to be maintained?
How will this pricing action affect the other parts of the portfolio?

After understanding pricing within the context of the brand role, manufacturers must then set their sites on regional and channel variations for pricing within and among channels and the value relationship between sizes. If managed strategically small price increases can be executed annually or bi-annually as needed.

When talking pricing, it is important to understand the relationship between everyday price relative to promoted price because that they are inextricably linked. Then, by developing SKU-level and brand-level elasticity, manufacturers can understand the impact on volume and profitability from pricing action and build scenarios relative to competitive responses.

It is very important to understand not only the volume impact, but also where the volume goes. Potential volume lost from pricing could stay within the manufacturer’s own portfolio and reduce the net impact, or leave the brand completely. By understanding brand elasticity, manufacturers can be more proactive in establishing pricing objectives with everyday low price (EDLP) retailers rather then assuming that all products benefit from shelf-price reductions.

In many cases, the product may be relatively inelastic to price reductions. Thus, both the retailer and the manufacturer are giving away profits unnecessarily. It is also important to understand critical promoted price points to determine if they are just legacy price points or whether the consumer really has been trained to identify those price points as value points.

Devil in the Details

On the execution side of pricing actions, it is important to determine how you think the pricing will be executed by key retailers. Will they will view this as an opportunity to take a gross margin increase or pass the increase on a penny-for-penny basis to the consumer. It is important to understand how the retailer views the role of the category within the context of their pricing and promotion philosophy.

Pricing is an opportunity for the trading partners to engage in collaborative discussions of the brand role relative to pricing and promotion. Any changes that reduce pricing complexity or simplify brand line pricing usually are received more readily. Most often, price declines need to be linked to some type of strategic event that will boost the brand performance to get full price reflection from retailers.

Bottom line: If pricing management is viewed as a strategic tool and part of the overarching brand resource mix, it will lead to successful execution and long-term benefits.

Paul Thompson is a partner in the Dallas office of Henry Rak Consulting Partners, a Chicago-based consultancy. We invite you to learn more about the HRCP partner team.

To learn more about HRCP and its services, visit www.hrcpinsights.com.

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