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Upsizing, Shrinkflation, Premiumization
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Upsizing, Shrinkflation, Premiumization

What’s the best pricing and packaging strategy for your brand?

Gerrit Schwarz

Few consumer packaged goods (CPG) manufacturers aren’t under pressure to find new growth opportunities, but market disruptions and self-inflicted wounds seem to derail progress more often than not. Common growth levers include rising prices, premiumization and downsizing, but applying these strategies randomly rarely generates consistently positive outcomes.

Drawing from Nielsen BASES’ history of testing over 200,000 new products and over 40 years of forecasting, we have a clear understanding of consumer demand and the impact that price and package changes have on that demand. Throughout our experience, we have identified a few strategies that have historically led to positive outcomes.

THE ‘OPTIMAL’ PRICE POINT DEPENDS ON YOUR GOALS

We often get asked to provide clients with an optimal price for new products or new pack sizes. 

Unfortunately, there is no simple answer or magical price point. Consumer value is not about price; it’s about the balance between price and benefit. Every pricing decision requires trade-offs between how you want to position your product in the marketplace, how much share you want to gain and how much profit you want to make.  

Choosing the right price is difficult. Price too high and your product won’t sell. And if it doesn’t sell, it might get delisted, which means it comes off the shelf. We’ve found that 90% of the products that are priced too high fail once they’re in the marketplace. 

On the other hand, price too low and you’ll suffer from missed revenues and profits. For many CPG products, a 10% higher price can yield upward of 20% higher profits.

Impact of Pricing on Product Launches

Delivering on Uniqueness is Particularly Important for Premium Products

Premium products require special pricing consideration, especially as more brands are establishing a “good-better-best” structure. 

Our historical tests show that a few key marketing execution factors need to be respected in order for the product to justify the premium in the eye of the consumer:

  • Premium products need to be differentiated and substantially unique innovations have higher in-market success rates.
  • Quality is equally important when establishing premium pricing strategies.
Average uniqueness ranking

With respect to premium pricing, product quality has to measure up. In a study of more than 100 initiatives, we gave the same product to households for in-home usage. At the onset, we communicated two different price points for the same product: one price for half the households and a higher price for the other half. Our results found that the higher-priced product did not meet consumers expectations as well as the lower-priced product. The finding here is clear: If you assign a premium price, make sure you have confirmed that your product experience is exceptional beforehand.

Post-use measures across pairs

Understand How Premiumization Will Impact Your Portfolio and Your Category

When launching premium products, it’s critical to consider their impact on your portfolio and the category.  

In most markets, buyers tend to buy across price tiers. Over time, premium buyers also buy less-expensive options. If you extend an existing brand into premium or you launch a new premium brand, you will always cannibalize your existing portfolio to some extent.  

That’s not to say that premium cannibalization is always bad. In fact, it can be an important strategic consideration for driving incremental growth. But many innovation qualification and validation processes don’t effectively identify the initiatives with the highest incrementality potential until it’s too late or too costly to change course. 

Evaluate your premium ideas on both volume potential and incrementality. That way you know which products provide the best opportunity to grow your brand through premium innovation. 

OPTIMIZING PACKAGE SIZE IS JUST AS IMPORTANT AS OPTIMIZING PRICE

For new and existing products, price and pack architecture can be a source of innovation and incremental growth.  

Sizing is as delicate as pricing. Changing pack size for many CPG products involves touching the positioning of the product itself. Consider carbonated soft drinks. In many markets, consumers are extremely familiar with typical sizes, anchored to a 0,33L can.

Brands can seek to break norms, but doing so comes with higher risk and must be treated carefully.

For example, launching an 0,300L can might fail to attract consumers simply because the pack size doesn’t meet the main usage occasion. However, Coca-Cola’s launch of mini-cans is regarded as a success. It kept health conscious consumers in the franchise who were looking for a smaller portion of their favorite drink and would have left otherwise.

The ability to change or innovate on size is heavily influenced by how much a category is anchored on size. As an example, look at Category A (a homecare category in the German market), the vast majority of the market centers around one size, and there is not much price differentiation. As a result, breaking away is hard without strong brand equity. Comparatively, sizes and priced in the example Category B (a personal care category in Germany) is much more diverse, which creates a more complex and differentiated category.

Some categories there is little anchoring of the size of a single item/serving, but count is very clearly understood. In other categories, consumers may have no knowledge of actual size or extremely diverse reference points. In these cases, brands may have greater freedom to work with sizes, but additional pack naming or communication may be needed to help consumers understand size.

Average pack-price: home care and personal

It’s easy to look at package size from purely a financial lens, but it’s important to consider the needs of the consumer: which pack sizes will fit key occasions and which outlets need to make different sizes.

TESTING IS KEY WHEN CHANGING PACKAGE SIZES

When the cost of goods increase, companies often look for ways to pass their incremental costs on to consumers, either by increasing the price or decreasing the pack size while maintaining a similar price point.   

Many marketers believe that reducing pack sizes will encourage more frequent purchases. Like many things that sound simple and intuitive, this is wrong.

Downsizing can be a very attractive option for increasing margins, but the majority of downsizings are actually not effective. In fact, 64% of pack downsizes across Western Europe and the U.S. hurt volume more than a straight price increase. Downsizing is effective for the remaining 36%, but it’s important to find the right options that consumers accept and work for retailers.

This does not mean that upsizing is always a safe bet. Large packs can be too big, too cumbersome to transport, too large to store, and too expensive for a single purchase.  

This is why testing the product before going to market is crucial. Understanding the consumer impact will help you decide whether downsizing, price increases or upsizing is the right decision for your category given consumer purchase behavior in a given market.