Pricing For Profit:
How To Improve Margins In A Highly Price-Sensitive Market
In a global Nielsen study of 36 countries, Australia was ranked the most price elastic for FMCG products; essentially making Aussies the world’s most price-sensitive grocery shoppers. For manufacturers and retailers, this poses quite the dilemma. If the price is the most powerful component of profitability, how can you best use it as a lever when you are working with shoppers who are always on the lookout for the best bargain in this industry?
Before we answer this question, it is important to highlight that using pricing continuously as a lever will eventually lose its efficiency if share-driven strategies (e.g. week on/week off discounting) are consistently applied. Shoppers just come to expect the frequent discounting after a few purchase cycles.
In reality, shoppers’ volume responsiveness to price (elasticity) depends on the way that people shop for specific categories, brands and products. This behaviour should dictate the way prices are adjusted as these variances can significantly impact your sales volumes/value/margin. For instance, shoppers' volume responsiveness to price is lower when brand loyalty and brand awareness is high. On the flip side, planned categories tend to be more elastic as shoppers are already looking for a good deal and are paying extra attention to prices; as opposed to impulse categories where they are more likely to purchase sweets or chocolate on a whim to treat themselves.
Embedded solutions such as Nielsen Everyday Pricing Analytics can help manufacturers uncover their profit opportunity by looking at shoppers’ volume responsiveness to the price of specific products and overall price architecture. This analysis has already been undertaken for almost 7,000 items across 22 categories and highlights where products can withstand an increase in price or an alternative value proposition. The following three strategies are some initiatives that can be applied in the near/short-term, based on learnings from this robust study.
1.UNDERSTAND SHELF AND PROMO PRICE ELASTICITY
Finding the right combination of shelf and promoted price and frequency that maximises long-term profit while retaining category value is a challenge. Australian shoppers are familiar with discounting and as such, deep price cuts are not always the most efficient approach. Understanding where different segments/brands/items sit on the pricing and promotional spectrum within a category is very important. Deep discounting might work for some items; while others may fare better under an everyday low price (EDLP) or value/bulk buy strategy.
For example, the ice cream category sits between being ‘highly sensitive to price’ and being ‘better for EDLP’. Drilling into the key segments uncovers that two-litre ice cream tubs can be highly sensitive to price, while fewer and deeper promotions tend to work best for premium tubs.
It is important to identify which highly promoted products would benefit from reduced frequency and intensity and which ones could do with a reinvestment strategy to drive sales outside of deep discounting.
Identify which products would benefit from reduced promotional frequency and which ones could do with a reinvestment strategy
2.PROVIDE A BALANCED INCENTIVE TO TRADE UP
Analysing your brand’s average versus regular price by individual product size or variant can reveal opportunities where there is room to increase the price. Looking at the example below we see that in order for this particular household brand to have the ideal incentive curve, the shelf price of the 2kg variant could be reduced, while more discounting could be applied to the larger 5kg pack to encourage shoppers to trade up.
3.REDUCE PACK SIZE
Reviewing your portfolio to identify where there is an opportunity to downsize a particular SKU while keeping the existing price point is another avenue to grow profitably value sales. This strategy typically works best when three factors are combined:
- Reduced cost efforts are paramount for a particular category.
- There is white space in the sizes of the variants in the category.
- The product size impression is only slightly impacted.
To minimise risk, potential new sizes should be tested with a sample of shoppers using virtual shelves to understand which downsizing fits best in the competitive set.
In a low growth or deflationary environment, our instinctive response lever is to pull price. It is important to remember, however, that even a small improvement in our promotions can help find large growth for manufacturers and retailers. One way to uncover this opportunity is to look at what is being promoting, analyse the elasticity of each product and find the right balance of promotions that minimise wastage.
ABOUT EVERYDAY PRICING ANALYTICS
What if you could optimise your price and promotion tactics, anytime you want? With Everyday Pricing Analytics, you can quickly view current price dynamics and pressures across all of your products and competitive set and simulate the impact of changes for specific banners and channels.
Everyday Pricing Analytics is a syndicated, web-based always-on solution which can help you make smarter decisions every day with scale. If you are interested in a demo or further explanation of the tool, please contact your Nielsen representative.