RESEARCH
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Pricing Is the Forgotten ‘P’
By Angela Grandolfo and Jean Luo
Cadent Consulting Group recently conducted a survey of consumer packaged goods (CPG) manufacturers and
retailers to understand an important, but often overlooked, component of successful growth and profitability -
strategic pricing. The results were telling. While pricing is a top priority for both retailers and manufacturers, we
found significant gaps in the development, communication and implementation of pricing strategies between the
two sides.
One of the most startling differences between manufacturers and retailers was their perception of effective pricing strategy. More than 70 percent of manufacturers responded that “sales managers can effectively communicate and execute” corporate pricing strategies, while only 30 percent of retailers responded that they could “articulate and understand” manufacturer pricing strategies. It was no surprise, then, that only 30 percent of retailers execute manufacturer pricing recommendations, or that the top pricing challenge for manufacturers was “retailers are asking for pricing that does not align with my strategy.”
Why does this happen?
Cadent benchmarked pricing processes across CPG manufacturers to further understand reasons for these differences. We found that pricing activities at the majority of manufacturers consist of competitive price gap management or elasticity analysis - approaches that look to current or past price points and aim to identify tactical optimization opportunities. This contrasts largely with survey feedback from retailers that list consumer understanding as the chief component of an effective pricing strategy. In fact, as retailers develop pricing strategies, they tend to look to the future and value the role of consumer trends. Interestingly, while consumer understanding may be integral to the marketing or innovation efforts of manufacturers, it is not even among the top 10 considerations in the development of pricing strategy.
Ultimately, Pricing has become the forgotten “P” relative to Product, Promotion, Packaging and Place/Distribution strategies. Manufacturers often have clear approaches for the latter four Ps, but confuse tactics for strategy when it comes to Pricing. The opportunity is to revisit the consumer value proposition to identify the benefits that matter most.
Value Drivers are key benefits with high pricing power. They are category-specific articulations of macro consumer trends, such as Health and Wellness or Convenience. Examples include premium or organic ingredients, and brands. These benefits drive the consumer value proposition and increase consumer willingness to pay. Identifying Value Drivers through research and analysis is the first step to taking a more strategic approach to pricing in an organization.
A case study reflects the power of making the shift from “Market Driven” to “Value Driven.” A consumer goods manufacturer assigned products on a cost-plus basis to one of two price points that enabled scale promotions. These price points were declining over time to meet the competition. The identification of value drivers led to a new approach on the number of tiers based on the type of product input. More importantly, the manufacturer was able to articulate its pricing strategy through benefit platforms, which also drove innovation opportunities. The overall profit impact was +16% and share increased.
Effective pricing and promotion strategies are essential for consumer goods manufacturers competing in a low-growth marketplace. Does the revenue management group understand the consumer value proposition of its products? Which benefits matter? Has the value on key benefits shifted? When evaluating price, it’s important to understand the “why” before tackling the “where, what, and how much.” Manufacturers often skip this step…and retailers can tell.
Angela Grandolfo and Jean Luo are the respective Principal and Senior Consultant with the Cadent Consulting Group, which serves the consumer packaged goods, retail and healthcare industries.
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