Consumer-led pricing overview for executives. Key questions and approach.
Calling all CEOs: If a genie offers to improve either your pricing, sales, or costs by 10%…choose pricing! It makes the biggest difference, because it is all profit. If for some reason the genie never appears, follow the consumer-led approach to pricing. Study the category and consumers, develop insights & new price options, and anticipate the impact on your business.
At the bottom of each section, we present a brief summary of findings for Jill’s Beef Jerky, an imaginary company.
I. Pricing context matters
A writer once told me, “You can’t dive right into the dialogue. You start by describing the room, the aroma, a painting on the wall…give the context where the conversation took place.” Before putting your price under the microscope, first remind yourself of the landscape. What and who is driving the market? What are the key new products, what are their characteristics, and how do they align with emerging consumer trends?
What is the size and growth of the overall market, each company, each product offering (e.g., small packs in the checkout vs take home bags) each key retail channel (e.g., Grocery, Convenience Stores, online)? Are your products in the growing areas, or shrinking ones? Who are your consumers, what do they value, and how are their preferences evolving?
NOTE — if you don’t have access to market and consumer data, there are a number of creative approaches. The most basic may be surveying your sales team
Jill’s Imaginary Beef Jerky Executive Summary: In 2016, Americans spent more on jerky, but they didn’t actually buy more of it. Why? Even though consumers started switching to more natural snacks, total sales went up because jerky prices on average were a bit higher than the year before, and people started buying more online, where prices are higher than in large retail outlets. One company led the way with 30% market share, then we were next with 20%. A new competitor has captured 10% share (double the prior year!) — they have great branding, innovative flavors, and excellent placement in the checkout in grocery.
II. Be a student of history, but live in the present
Pricing is very dynamic — the right price yesterday may not be the right price today. Unfortunately, too many companies only look at pricing strategy every few years when costs have increased, instead of developing a pricing strategy aligned with their mission, and then proactively seeking opportunities to grow profitably.
Detailed questions: Do you have a pricing strategy that aligns to your strategic objectives? Can anyone elaborate what it is? What happened the last time you changed price? How did consumers respond (what is the price elasticity of each product, or in other words, when you increased price by x%, by how much did your unit sales decrease?) How did the competition respond?
Extra credit: How did different groups (or segments) of consumers respond differently (did you lose your most/least valuable?)
Jill’s Imaginary Beef Jerky Executive Summary: It took a while to dig up the details because we’ve had a lot of turnover. Two years ago, beef & pork costs were extremely high, so we had to increase price by 10%. Fortunately, we only lost 3% of our volume sold. Soon, another jerky company raised prices even higher (15%). Surprisingly, they only lost 3% of volume as well. Now they are probably more profitable than us and have more cash to invest in international expansion.
III. What is the right price? Look at the data and develop options.
In the key places you are selling, examine the available pricing data (and where lacking, use surveys and interviews) to understand the competition’s pricing strategies and compare performance. Complement the data with visits to retailers, websites, and sample competitors’ products if you haven’t already. These insights will help you develop a range of new pricing options to model for financial impact.
Detailed Questions: What are consumers paying for my core products in key outlets (and how does it vary across these outlets)? How does it compare to the competition (typical price and when on discount)? How much of a discount do I offer for the larger package? Have I crossed or am I near any “magic” price points (key pricing thresholds where volume drops massively?) Are there any price ranges that are growing and would be ‘white space’ for a new product?
Jill’s Imaginary Beef Jerky Executive Summary: When I walk in the store, our every day price on shelf is cheaper than the main competition, but the data tells me they have a lower average price than we do. Turns out they are doing a lot of discounting — deep and often. It is paying off because they are taking share from us, but also are running the risk of training consumers to only buy on sale and hurting their brand equity. Also, more and more consumers are buying the bulk size that we offer at a 25% discount per ounce — our margins aren’t great, so the discount hurts our overall profitability.
IV. Predict the future
Using the above analyses (especially price elasticity) to calculate the financial impacts of your different options. If you aren’t confident in your assumptions or want more data, you may also consider a predictive study such as a conjoint. This type of consumer research lets you survey only your target consumers (e.g., people who bought beef jerky lately in your top retailer) and present them different options in a replica retail setting.
Detailed Questions: What is the impact of each of your options on your sales & profit? What about for your major partners (retailers)? How does each price option fit with your brand strategy & positioning, and how consumers feel about the value of your products?
Jill’s Imaginary Beef Jerky Executive Summary: Based on our consumer research, it looks like there will be a lot of volume loss if we increase price right now. So rather than directly raise our price right now, we will reduce the size of our product by 5%, which will help us pass along some of the increase in our cost of goods. We are improving our packaging and nutrition, which may help justify a direct price increase down the road.
*Remember that in a retail environment, retailers set price at their discretion. Manufacturers can only recommend a suggested resale price (SRP)