Whether you’re a retailer or a manufacturer, pricing and promotion spend is one of the largest costs of doing business. But it is also one of the most inefficient. Just this year, the fast-moving consumer goods (FMCG) market saw two consecutive quarters of retail sales decline. And the industry's response may be adding to the problem.
We’ve seen a slowing of price increases across nearly every category and department, and at the same time, we’ve also seen an increase in promotion frequency. However, these investments have resulted in very little lift and few dollars returned.
So how can manufacturers and retailers win in such an uncertain and changing environment? Through our research, we’ve identified five opportunities to create more efficient price and promotion strategies, reverse negative trends and drive profitability.
We know that prices are a big factor in where shoppers choose where to shop. But did you know that only a handful of items, known as key value items (KVIs), drive more than 50% of shoppers’ perception of a retailer or brand’s overall value? Take an 8-ounce bag of cheese, for example. A shopper may develop a “value perception” based on what they think the price of the cheese should be—thus making it a KVI.
During a recent study of multiple retailers, we found that only 5% of UPCs drove U.S. shoppers’ value perception of the franchises. That’s a lot of importance attributed to a small percentage of items. And in looking at those KVIs, we noticed that 55% of them were over-priced to shopper’s value perception and negatively affected ROI.
Leveraging KVIs can improve shoppers’ value perception of you, drive extra trips into the store and ultimately win a greater share of wallet. For retailers and manufacturers looking to make KVIs their compass, three steps can help drive results:
In our study, we also saw that 32% of all items were price insensitive and underpriced versus where they should be, meaning that shoppers were not as attuned to price or willing to purchase the product regardless of cost. Given this information, we believe the best way to get the price right on the 5% of items that drive value perception is to shift dollars from products where price isn’t as important to KVIs.
The first step is to identify the price insensitive products within your store or portfolio that are underpriced versus their benchmark. Next, use your underpriced UPCs to invest in your overpriced KVIs to win on price with the items that matter to shoppers and drive profitability.
In thinking about price changes, it’s important to not just look at these adjustments from an item perspective but also in the context of portfolios and categories. Many times we see that:
Retailers, for example, can look at their portfolio and try to understand the price gaps between items, such as private-label and national brand offerings. Consider what value each item brings to the marketplace versus the alternative, and then choose the value that maximizes total combined margin or volume. Doing so can help support better pricing strategies.
On a tactical level, being strategic in how you deploy price is critical. There are many levers around deploying price, with the two biggest being the everyday shelf price and the promoted price.
We’ve developed a simple framework to help marketers understand how to build more effective pricing strategies.
Two points stand out in this chart:
When it comes to promotions, remember that physical in-store space to communicate with shoppers is limited. And companies are giving far too much support to items that aren’t returning the favor:
Be thoughtful about the items you feature and put on display by focusing on the ones that drive additional trips and grow baskets. Circulars should focus on driving traffic into the store, while displays should help shoppers build baskets and increase rings in the store.
This all nets down to three big ideas:
These ideas, paired with regular measurement against targets every week, provide a reliable framework that you can use to quickly price items for maximum revenue and profit.